Tax clauses in the SPA - do's & don'ts

published on 20 December 2024 | reading time approx. 3 minutes

A company acquisition not only has financial and legal consequences. In particular, it also regularly leads to far-reaching tax implications. Tax due diligence deals with the identification and assessment of potential tax risks. The tax clauses in the SPA deal with the specific handling of these risks. Careful drafting of the tax clauses is therefore very important in order to avoid tax surprises later on.

What are tax clauses?

Tax clauses in the SPA primarily regulate how the tax risks in connection with the company being sold are to be allocated between the buyer and seller. The tax rights and obligations of the contracting parties are defined in such clause. It also specifies who is responsible for the taxes of the company being sold. This involves not only future taxes, but above all possible risks from the past, i.e. in particular with regard to possible additional tax claims as a result of tax audits for assessment periods prior to the company purchase. Specifically, it is decided to what extent possible additional tax claims are to be borne economically by the buyer of the company or whether the seller is liable for them. In addition, there is often a need to regulate the rights and responsibilities with regard to the submission of tax returns and cooperation in tax audits, insofar as these relate to periods prior to the company acquisition. As a result, cooperation between the buyer and seller is usually advisable here.

What is important from the buyer's point of view?

The main concern from the perspective of a company buyer is to ensure that the seller is liable for all potential tax liabilities, particularly via a tax indemnification clause. A company buyer should agree a comprehensive exemption from all taxes relating to periods before the company purchase, i.e. generally before the economic transfer date. In particular, this involves protection against additional tax payments from tax audits that relate to periods before the company purchase and for which the seller should continue to bear responsibility.

Practical example: In a company acquisition, the buyer acquires all shares in a GmbH in 2024. During a subsequent tax audit in 2026, it will be discovered that real estate transfer tax was triggered undetected in 2022 during a restructuring. This will result in an additional tax claim of EUR 100,000. The buyer will then be able to claim this amount from the seller on the basis of a tax indemnification clause.

In addition to a tax exemption, guarantee clauses are often agreed whereby the seller guarantees that the tax obligations have been met up to the time of the sale. These guarantee clauses are particularly important if the buyer wishes to protect himself against risks arising from certain issues that have been identified as relevant during the tax due diligence process.

Practical example: As part of the tax due diligence, the seller states that the target company is not obliged to prepare transfer pricing documentation. However, information to verify this is not provided. In the SPA, the seller therefore gives a guarantee at the request of the buyer that the target company is not obliged to prepare and/or submit transfer pricing documentation. If the guarantee later proves to be false, the seller would have to compensate the buyer for all financial disadvantages associated with this.

What should the seller pay attention to?

The seller's motivation is generally to assume as little liability as possible following the sale of the company. If, as is customary, liability for taxes from periods up to the date of sale is agreed as part of a tax clause, it is in the seller's interest to limit this indemnification to the extent necessary.

In particular, tax risks that have already had an impact on the purchase price determination should be excluded from the tax exemption so that there is no double consideration. In addition, restrictions on the exemption obligation are conceivable both in terms of time and amount. For example, it could be stipulated that the exemption obligation applies for a maximum of three years after the sale, after which it becomes time-barred. In addition, the amount of the indemnification obligation could be limited to a maximum amount.

Practical example: The seller sells his company in 2024. In the tax indemnification clause in the SPA, it is agreed that claims for tax exemption expire after three years. In 2029, a tax audit will determine that back taxes of EUR 100,000 must be paid for 2023. The buyer or the purchased company will have to bear this additional tax payment, as the claim for exemption will already be time-barred.

It is also important that the seller is granted sufficient rights of cooperation or rights to issue instructions in relation to future tax proceedings in the tax clause. This is the only way to ensure that his interest in a committed defense against excessive claims by the tax office, especially in the context of a future tax audit, is sufficiently safeguarded.

Practical example: A tax audit is carried out on the purchased company. The buyer considers whether to accept an additional tax payment proposed by the tax office, as he had agreed a tax exemption in the SPA at the time. After looking at the tax clause, he realizes that he may only reach an agreement with the tax office with the express consent of the seller, otherwise he will lose his right to tax exemption.

Conclusion

Even small mistakes in the tax clause can cause considerable financial consequences. Therefore, appropriate care should be taken when drafting and negotiating the tax clauses in the SPA. This will ensure that the company acquisition is also a success from a tax perspective.