Meaning
Specific clauses in an acquisition agreement provide targeted protection for the buyer against known or suspected tax liabilities arising from pre-closing periods. A special tax indemnity differs from a general tax warranty by covering a precise issue identified during due diligence, such as a pending dispute with a revenue authority. It creates a dollar-for-dollar obligation for the seller to reimburse the buyer for the specific tax, interest, fees and penalties related to that issue.
This tool allows parties to move forward with a transaction even when a substantial tax risk remains unresolved.
Trigger Mechanism
Assessment of the final tax bill or a court ruling usually triggers the payment obligation. This special tax indemnity ensures that the buyer does not bear the cost of the seller’s past tax strategies or errors. It often lacks the thresholds or deductibles that limit general claims in the agreement.
Sellers remain responsible for the full amount of the identified risk from the first penny because the indemnity lacks a deductible floor. Total liability continues until the risk is fully resolved.
Duration Limit
Timeframes for these protections usually align with the statutory period during which the tax authority can legally challenge a filing. A special tax indemnity typically lasts longer than operational warranties because tax audits can take years to conclude. The seller may be required to post collateral or keep a portion of the sale proceeds in reserve to back this promise.
Sellers view these indemnities as a contingent reduction in their net proceeds from the exit.
