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

Slovakia - Tax impact of warranty clauses

Tax impacts of warranty clauses in Slovakia.

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Slovakia - 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)?

Yes, the tax treatment depends on the legal classification.

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

Yes, the classification is 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)?

Not very often.

Is the classification usually mentioned in the SPA?

Yes, it is.

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

No such specific distinction in Slovakia, reduction of purchase price is treated differently than the indemnification due to the nature of the arrangements – the indemnification may be regarded as a kind of contractual penalty which is not tax deductible when paid and taxable when received.

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

It depends on the type of company being sold and statutes of limitation.

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?

No, it is usually part of the SPA + there is no different tax treatment for a separate warranty agreement to 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)?

Full indemnification is most often agreed.

Acquirer

  Corporate
Income Tax
Personal
Income Tax

Price reduction clause Lower acquisition value of shares Lower acquisition value of shares 
Indemnification clause Taxable income (21%) Taxable income (19% or 25%)

Vendor

  Corporate
Income Tax
Personal Income Tax 
Price reduction clause Lower capital gain Lower capital gain
Indemnification clause
Non-deductible cost Non-deductible cost 

Target

Price reduction clause No impact
Indemnification clause No impact if not collected by the Target, otherwise taxable income.

Contact

Zuzana Blazejova - KPMG in Slovakia

Partner, Tax

Tel: +421259984331

zblazejova@kpmg.sk

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