Huygens Quantitative Tax Consulting

Estimating the economic value of an uncertain tax claim on a BIT award

Assisting in M&A price negotiations by estimating the value of an uncertain tax claim.

The Case


  • A private equity fund (‘Fund’) held 30% of the shares in an infrastructure project company (‘ProjectCo’) via a Dutch holding (‘BV’) and a UK Holding Ltd. (‘Ltd’).
  • The project was awarded a government license, which – after a political change – the new government refused to extend.
  • Fund management lodged and won an arbitration procedure under both the Dutch and UK bilateral investment treaties with that third country (‘BIT Claim’).
  • Approaching Fund’s closure, Fund Management wished to accelerate the monetisation of the award by divesting the shares in Ltd (and thus indirectly in BV) to a specialised award enforcement funder (‘buyer’).
  • In the price negotiations, buyer’s counsel discounted 25% for corporation tax on the award, which Fund’s counsel disputed on the basis of the (tax technical) arguments that
    • BV lacked the functionality to be allocated the award;
    • the award would be exempt under the participation exemption; and
    • at least part of the award should be allocated to Ltd, not BV.


The Challenge


  • Fund management and buyer wished to resolve the uncertain tax issue and sought coverage under a W&I insurance policy, the cost of which would be shared between the parties.
  • To prepare for price negotiations with the insurance company, fund management and buyer wished to have an estimate and substantiation of the insurance premium.


The Solution


  • The technical insurance premium was calculated by analysing all possible tax scenarios in a decision table analysis. The technical premium is the probability weighted average of all possible scenarios, which according to the analysis was €2.35 million.
  • Subsequently, the insurance company’s equity at risk (‘EaR’) was established, being the maximum loss from insurance with a 99.5% confidence level, which was analysed to be €29.14 million. On the EaR the insurance company would seek an estimated 5-7% return, i.e. €1,457,000-€2,040,000.
  • It was finally estimated that approximately €175,000 had to be added for general and administrative expenses (‘G&A’).
  • The estimated insurance premium would range between €3,983,000 and €4,566,000 exclusive of insurance tax, see breakdown.
  • The analysis provided parties with the relevant ingredients to negotiate a premium that was acceptable to both.