A global developer of renewables assets had disposed of a portfolio of South African assets to a Private Equity buyer. The Buyer’s due diligence exercise flagged a previous assignment of shareholder debt in the Target as potentially giving rise to a tax charge.

The concern was that the assignment of the shareholder loan gave rise to a waiver or recoupment of such liability in the hands of the Target, which would in turn give rise to a corporate income tax charge. A portion of the purchase consideration was therefore held in escrow, while the parties looked to negotiate the merits of the Buyer’s DD findings. The parties’ professional advisors gave conflicting views on the tax treatment of the assignment of the debt, and as such the escrow amount remained in place.

The Seller secured an insurance policy in favour of the Buyer that the assignment did not give rise to a corporate income tax charge. This gave the Buyer sufficient comfort to release the escrow, and as such the Seller could receipt a sizeable outstanding balance of the purchase consideration.