Meaning
An indemnity product provides financial protection against potential tax assessments that arise after the closing of a corporate transaction or the liquidation of a legal entity. This run off tax liability insurance covers the risk of the State Taxation Administration discovering unpaid duties or noncompliance during a retrospective audit. This policy is a common tool used in mergers and acquisitions to facilitate the exit of a seller.
Coverage Window
The policy typically stays in effect for the duration of the statutory limitation period for tax audits. This run off tax liability insurance provides protection for several years after the company has ceased its primary operations or changed ownership. The period of coverage aligns with the time during which the tax authorities can legally challenge previous filings.
Risk Allocation
Parties use the policy to transfer the uncertainty of future tax claims to an insurance provider. This run off tax liability insurance allows the buyer to proceed with the acquisition without the need for a large escrow account or indemnity from the seller. The insurer evaluates the tax history of the target company before setting the premium.
Statutory Responsibility
Legal entities remain liable for their historical tax obligations even after a change in control. This run off tax liability insurance ensures that funds are available to settle any legitimate claims made by the tax bureau. The policy protects the directors and officers of the liquidated company from personal liability in cases where the corporate assets were already distributed.
Settlement of a tax claim is handled directly by the insurance company in coordination with the tax advisors.
