Austria - Tax impact of warranty clauses - KPMG Global
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Austria - Tax impact of warranty clauses

Austria - Tax impact of warranty clauses

Tax impacts of warranty clauses in Austria.

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Austria

Does the seller grant warranties or indemnities to the purchaser when acquiring a company?

This is a matter of negotiations.

Does the tax treatment of the warranty depend on its legal classification (e.g. indemnity vs. reduction in the purchase price vs. others)?

The tax treatment depends on the wording of the clause and who will be the recipient of any payments in case of a breach of warranties. The individual clause needs to be analyzed.

Is classification of the contractual warranties as a price reduction clause or an indemnity clause relevant in your jurisdiction?

Typically, a warranty is treated as a price reduction but as mentioned above this depends on the individual wording of the clause.

Are mixed clauses included in the SPA (for instance, a warranty drafted partially as a price-reduction clause for the portion corresponding to the purchase price and as an indemnity clause for the amount exceeding the purchase price)?

We have seen SPAs that included both a tax warranty and a tax indemnity, but typically there is an overall cap with the purchase price.

Is the classification usually mentioned in the SPA?

Yes.

Are there criteria to distinguish between a price reduction clause and an indemnity clause? Could you briefly describe these criteria?

There are no general criteria. Thus, this needs to be reviewed on a case by case basis.

What is the most common type of warranty in your jurisdiction?

Typically, a warranty is treated as a price reduction but as mentioned above this depends on the individual wording of the clause.

Is a tax warranty usually provided by way of a separate warranty agreement (different from the SPA)? Would the tax treatment of the tax warranty then be different from the treatment described above?

The tax warranty is typically included in the SPA.

Is it usual / a market practice to negotiate after-tax settlements, i.e. to reduce the price adjustment to a net payment (i.e. indemnity minus the tax effect of the deduction for the acquirer or target) or to guarantee full indemnification (i.e. gross-up payment to guarantee a net indemnity)?

This is subject to negotiations.

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares.
Consequently, future capital gains will be increased.
The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares.
Consequently, future capital gains will be increased.
Indemnification clause
In case the tax indemnity does not qualify as price reduction, the payment would represent taxable income. In case the tax indemnity does not qualify as price reduction, the payment would represent taxable income.

Vendor

  Corporate Income Tax
Personal Income Tax
Price reduction clause The price adjustment results in a decrease of the capital gain. The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares.
Consequently, future capital gains will be increased.
Indemnification clause Tax deductibility needs to be analyzed and depends on the individual situation. Tax deductibility needs to be analyzed and depends on the individual situation.

Target

Price reduction clause

Assuming that the price reduction is agreed between seller and purchaser and target is
not entitled to receive any payment, there is no tax impact on the level of the
target.

If target would receive any payments, this will need to be structured carefully in order to avoid any potential adverse impact.

Indemnification clause

Assuming that the indemnity is agreed between seller and purchaser and target is not
entitled to receive any payment, there is no tax impact on the level of the
target.

If target would receive any payments, this will need to be structured carefully in order to avoid any potential adverse impact.

Contact

Barbara Polster - KPMG in Austria

Partner, Tax

Tel: +43 1 31332 3815

BPolster@kpmg.at

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