1. A targeted transfer of tax risk
Tax liability insurance is a bespoke solution designed to cover a specific, identified tax risk. Rather than leaving the financial consequences of a challenge from a tax authority to be borne by a buyer, seller, sponsor or portfolio company, the policy transfers the known tax exposure to an insurer who agrees to assume it, subject to the policy’s terms and conditions.The scope of cover is tailored to the circumstances of each case. Depending on the transaction structure and the parties' needs, cover may extend to the underlying tax liability, related interest, insurable penalties and professional fees incurred in defending the insured position. Where relevant, it may also cover tax incurred on insurance payouts and advance tax payments required while an assessment is being challenged.
Tax insurance policies are typically issued for a 7-year period to ensure cover remains available throughout the period during which the relevant tax position may be challenged. Once a challenge arises, the policy remains in force until the matter has been finally resolved. A 10-year policy may also be available in certain circumstances.
Tax insurance serves a different purpose to Warranty & Indemnity Insurance (W&I). While W&I principally covers unknown risks arising from breaches of warranties and indemnities (including tax indemnities), tax insurance focuses on a specific issue that has already been identified and analysed and that will most likely be excluded from W&I cover. A standalone tax policy can address known exposures directly and may replace or sit behind a specific indemnity. As a result, the two products are often complementary and can be used alongside each other in the same transaction.
Importantly, tax insurance does not protect against aggressive tax planning, compliance failures or future changes in legislation. Insurers typically require a well-supported position, robust factual evidence and credible professional analysis before considering coverage. Where these elements are present, insurance can be a practical means of transforming potentially disruptive uncertainty into a quantified, manageable commercial risk.
2. Why Latin America is moving towards insurance
Deals involving entities in Latin American countries, as well as transactions that directly or indirectly involve assets or operations in Latin American jurisdictions, frequently involve multiple sources of complexity. These include evolving legislation, differing administrative interpretations, extensive indirect taxation and lengthy assessment or dispute processes in some markets. These features underline the need to identify tax risk factors early, conduct disciplined due diligence, access local expertise and consider practical alternatives for mitigating and managing those risks.Against this background, just as tax insurance has secured its place as a well-established transactional tool in Europe, investors, corporations and funds are increasingly enquiring about the possibility of transposing this trend into the Latin American market. For those familiar with the product or who have worked in the structuring of tax insurance solutions, the premise is now clear: no matter whether it is a cross-border M&A, an internal reorganisation or a new operation, the increasingly strong assertiveness of tax authorities always leads to the same conclusion: certainty is worth paying for.
It is also well known that tax enforcement is becoming more data-led and internationally connected. The OECD’s 2026 Latin America transparency report shows that, in 2025, countries in the region identified more than EUR 576 million of additional tax revenue through exchange-of-information initiatives and related voluntary disclosure programmes. This suggests that historical positions, offshore arrangements and inconsistencies between jurisdictions will be examined more effectively, opening up new horizons for risk management strategies, with tax insurance undoubtedly being the main one. For investors and stakeholders, the practical issue is no longer simply whether the technical position is supportable. The key question now is whether potential exposure can be quantified, allocated and managed without delaying the transaction, depressing value or tying up capital for an extended period.
3. Where tax insurance creates value
Tax insurance can create value at any point in the investment lifecycle, not only immediately before an acquisition. Examples in both M&A and non-M&A contexts include:
- Acquisitions and investments: Where a tax issue is identified during due diligence, insurance can prevent it from becoming the defining feature of the negotiations. With tax insurance, buyers are protected against defined risks, while sellers can often avoid extensive escrow arrangements, prolonged indemnity obligations, and value erosion through price adjustments. Ultimately, tax insurance allows sellers to achieve a cleaner exit. It can also strengthen a bidder’s position by reducing demands for escrow, retention or broad seller indemnity.
- Corporate reorganisations: Mergers, demergers, internal transfers, refinancings, carve-outs, pre-sale restructurings and ownership realignments designed to support strategic objectives may depend on a particular tax characterisation or exemption. Insurance can provide additional financial certainty where a formal tax ruling is unavailable or cannot be obtained in time to meet commercial deadlines.
- Cross-border structures: The effectiveness and efficiency of international investment platforms and holding structures often hinge on assumptions relating to withholding taxes, treaty benefits, financing arrangements, tax residence, exposure to permanent establishment provisions or the preservation of tax attributes. Insurance can support these assumptions where an adverse outcome could have a significant financial impact.
- Long-term capital projects: Infrastructure, energy and other capital-intensive projects are often based on specific tax assumptions that are built into financial models and financing arrangements. Tax insurance can help to protect these assumptions, providing comfort to sponsors, lenders and investment committees when evaluating project viability.
4. Bridging the allocation gap in M&A context
Tax issues arising during transactions are rarely driven solely by a disagreement over the law. More commonly, the parties agree that an exposure is unlikely, but disagree about how likely it is to materialise, who should bear it, how much should be reserved, and for how long. For example, the seller may refuse an indemnity that delays distributions, the buyer may be unwilling to assume a potentially significant liability, and lenders or investment committees may require greater certainty before approving funding.
Tax insurance can allow a negotiation to focus on wider commercial terms while preserving the negotiated valuation, and reduce post-closing counterparty risk. It may also release reserves, improve cash flow predictability, and enable investment proceeds to be distributed or reinvested.
This is becoming increasingly relevant to dealmakers in Latin America. Tax matters in Latin America are widely considered to be among the most challenging areas in which to conduct thorough due diligence and reach an agreement on how to manage any identified exposure. This makes the commercial case for addressing insurability early compelling: insurance should be evaluated while transaction documents and risk-allocation mechanisms remain flexible, rather than waiting until positions have hardened.
5. Tax insurance feasibility: discipline determines the outcome
Insurability is case-specific. Underwriters will examine the technical analysis, factual evidence, transaction steps, relevant precedents and potential loss calculation, as well as the taxpayer’s compliance history. They will also consider the jurisdiction, the rule of law, the governing law, the identity and domicile of the insured, and local insurance requirements. Clear documentation and experienced local advisers are often crucial in obtaining meaningful quotes and avoiding exclusions at a late stage.
Investors should start by asking three questions: What precise risk would need to be insured? What financial loss would arise if the position failed? What evidence supports the intended treatment? From there, the focus should be on whether insurance can provide a commercially feasible solution. Engaging in this discussion early on can help ensure that the insurance solution aligns with the objectives of the transaction or investment and does not introduce additional complexity later on.
Tax insurance is most effective when incorporated into transaction design, investment, and structuring governance decision-making processes, rather than being used as a last-minute substitute for incomplete due diligence.
How DWF can support your clients
DWF and HWF can work with clients to:
- identify and assess transactional tax risks at an early stage;
- evaluate the feasibility and commercial value of tax insurance placement;
- structure tax risk solution in M&A and private equity transactions;
- address risks arising from cross-border acquisitions, financing and corporate structures;
- coordinate and structure tax insurance workstreams across different jurisdictions; and
- negotiate policy coverage, exclusions, limits and claims arrangements aligned with the client’s investment objectives.
About HWF Partners
HWF Partners is a specialist insurance brokerage focused on transactional risk insurance, including Warranty & Indemnity Insurance, Tax Liability Insurance and Contingent Risk Insurance. The firm advises corporate clients, private equity funds, investors and legal advisers across Europe and Latin America on complex transaction-related risks.
This article is provided for general information purposes only and does not constitute legal, tax or insurance advice.
We would like to thank Claudia Léon for her contribution towards this article.
