Cross Border Holding Company Share Dispositions and Indirect Capital Gains Taxation
Cross-border indirect share transfers trigger host-state capital gains taxation and mandatory buyer withholding when holdcos derive primary value from local assets.
Share Purchase Agreement Tax Covenants
Meaning
Negotiated indemnity related to tax matters within a share sale agreement. These share purchase agreement tax covenants function as a broad indemnity where the seller agrees to compensate the buyer for any tax liabilities relating to the period before the completion of the sale. They provide a clear allocation of tax risk between the two parties.
Liability Coverage
Protection extends to taxes that were not disclosed in the accounts or that arise from an audit of the pre-completion years. The share purchase agreement tax covenants usually cover the principal amount, interest and any related legal penalties. This ensures the buyer does not inherit the unpaid tax debts of the target company.
The covenant often includes a pound-for-pound indemnity that is not subject to the same limitations as a standard warranty claim.
Conduct of Claims
Provisions within this section dictate how the parties must interact if a tax authority opens an investigation. The buyer is generally required to notify the seller of any communication from the revenue office. Control over the defense of the claim is often given to the seller, as they are the party ultimately liable for the payment.
Time Limit
Sellers negotiate for a specific period after which their liability under the document ends. While general warranties might expire after two years, the share purchase agreement tax covenants often remain in effect for seven years to align with the statute of limitations for tax audits.