Indirect Transfer Taxation When the Holding Company Changes Hands
Indirect transfer tax legislation permits revenue agencies to tax foreign share sales by looking through intermediate holding entities to underlying local assets.
Gross-up Covenant
Meaning
Contractual agreement requires a borrower or payer to increase their payment to ensure the recipient receives a specific net amount after any withholdings. The inclusion of a gross-up covenant places the risk of future changes in tax rates entirely on the party making the payment. Investors utilize this language in credit agreements and share purchase documents to maintain target yield.
It serves to protect the economic benefit of the deal from sovereign policy adjustments.
Payment Adjustment
Calculation formulas specify the precise additions needed to counter government levies. When a tax change occurs, the gross-up covenant activates to expand the total transaction size so that the original figure remains unchanged. This creates a floating cost structure that the payer must monitor throughout the life of the obligation.
Indemnity Provision
Protection extends beyond simple arithmetic corrections into broader liability coverage. A standard gross-up covenant often lists specific exemptions for taxes related to the bank’s own profit or connection to the jurisdiction. These exclusions prevent the payer from being responsible for the administrative defaults of the receiver.
Contractual Conflict
Negotiations regarding these terms often represent a direct contest over leverage between parties. Payer resistance to a gross-up covenant is common when tax outcomes are unpredictable or the state is known for aggressive assessments. Agreements without these clauses force the investor to bear the burden of fiscal instability.