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

Egypt - Tax impact of warranty clauses

Tax impacts of warranty clauses in Egypt.

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Egypt - Tax impact of warranty clauses

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

Normally yes. However, it depends on their agreement.

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

What we have seen is a reduction in the purchase price that is included in an escrow account.

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

This is a contractual relationship and such clause is included in the SPA.

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 not seen mixed clauses in practice.

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?

No criteria is in place from a tax perspective.

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

Reduction in price. However, indemnity is acceptable as well.

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?

Normally, it is 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)?

We were not involved in this in all M&A transactions.

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause Same as in France. Additionally, the acquirer is not subject to tax when the investment is acquired. Same as in France. Additionally, the acquirer is not subject to tax when the investment is acquired.
Indemnification clause The acquirer is not subject to tax when the investment is acquired. Tax on capital gains is on the vendor. The acquirer is not subject to tax when the investment is acquired. Tax on capital gains is on the vendor.

Vendor

  Corporate Income Tax
Personal Income Tax
Price reduction clause
Same as France. However, how this will be reflected in the contract isan element to identify the tax treatment. Same as France. However, how this will be reflected in the contract is an element to identify the tax treatment.
Indemnification clause It would be regarded as part of the selling price that will be used to calculate the capital gain that will be subject to capital gain tax which will be borne by the vendor. It would be regarded as part of the selling price that will be used to calculate the capital gain that will be subject to capital gain tax which will be borne by the vendor.

Contact

Maged Elmenyawi - KPMG in Egypt

Partner, Tax

Tel: +20235362211

Melmenyawi@kpmg.com

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