close
Share with your friends

Russia - Tax impact of warranty clauses

Russia - Tax impact of warranty clauses

Tax impacts of warranty clauses in Russia.

1000

Related content

Russia - Tax impact of warranty clauses

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

Yes, the seller grants warranties or indemnities to the purchaser when acquiring a company

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

No, the tax treatment of the warranty does not depend on its legal classification.

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

No, the classification of the contractual warranties is not relevant.

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)?

Mixed clauses of this kind are not common.

Is the classification usually mentioned in the SPA?

Since the tax treatment of the warranty is neither specified in the RF Civil nor the Tax Code, irrespective of how warranty/indemnity payments are stated in the SPA there is a risk that they could be taxable in Russia.

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

No, such criteria is stipulated by the RF Tax or Civil Code. Generally a price reduction clause made prior to Closing could be treated as decrease in investment value of the shares and might not have direct impact on the taxable income of the purchaser. In case of indemnity, there is a risk that it could be taxable in Russia and will depend on the wording of the specific SPA.

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

A price reduction clause is more common in the case of quantifiable high risk tax exposure items. Blank tax indemnities are not uncommon. Specific tax indemnities and warranties depend on the specific tax risks.

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?

Provided the warranties and/or indemnities form part of the overall sale agreement, the particular way they are documented does not change the tax treatment.

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)?

Yes, it is.

Acquirer

  Corporate
Income Tax

Personal
Income  Tax

Price reduction clause

According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the price reduction after the transfer of
title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of price reduction clause is limited. According to it, the taxation depends on the terms of
specific SPA and on the fact whether the reduction is to take place before the Closing. If yes, it is treated as a decrease in investment value of the shares.

Consequently, future capital gains will be increased. If not, such gains could
be taxable in the hands of the Russian recipient of income.

According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the price reduction after the transfer of
title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of price reduction clause is limited. According to it, the taxation depends on the terms of
specific SPA and on the fact whether the reduction is to take place before the Closing. If yes, it is treated as a decrease in investment value of the shares.

Consequently, future capital gains will be increased. If not, such gains could
be taxable in the hands of the Russian recipient of income.

Indemnification clause According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the indemnification clause after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of indemnification clause is limited. Therefore, if the buyer receives payment under indemnification clause such payments could be taxable
in Russia.
According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the indemnification clause after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of indemnification clause is limited. Therefore, if the buyer receives payment under indemnification clause such payments could be  taxable in Russia.

Vendor

  Corporate
Income Tax
Personal
Income  Tax

Price reduction clause

According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the price reduction
after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of price reduction clause is limited. According to it, the taxation depends on the specific terms of SPA and on the fact whether the reduction is to take place before the Closing. If yes, it is treated as a decrease in investment value of the shares.

Consequently, the capital gain is decreased. If not, such expenses could be non-deductible for the profits tax purposes.

According to the RF tax legislation the price of the deal is determined either on the day of the transfer of title to shares or based on the specific terms of the SPA. Tax treatment of the price reduction after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The court practice on the taxation of price reduction clause is limited. According to it, the taxation depends on the specific terms of SPA and on the fact whether the reduction is to take place before the Closing. If yes, it is treated as a decrease in investment value of the shares.

Consequently, the capital gain is decreased. If not,
such expenses could be non-deductible for the profits tax purposes.

Indemnification clause According to the RF tax legislation the price of the deal is determined either on the day of the transfer of property rights or based on the specific terms of the SPA. Tax treatment of the indemnification clause after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code. The payments which are
made afterwards by Vendor could be ether deductible or non-deductible for profits tax purposes depending on the specific terms of the SPA.
According to the RF tax legislation the price of the deal is determined either on the day of the transfer of propert rights or based on the specific terms of the SPA. Tax treatment of the indemnification clause after the transfer of title or after Closing as stated in the SPA is neither specified in the RF Civil nor the Tax Code.  The payments which are made afterwards by Vendor could be ether deductible or non-deductible for profits tax purposes depending on the specific terms of the SPA.

Target

Price reduction clause N/A
Indemnification clause In case the Target receives the payment under the indemnification clause such payments should be subject to profits tax.

Contact

Robert Wallingford - KPMG in Russia 

Partner, Tax

Tel: +74959374444

bwallingford@kpmg.ru

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal