Meaning
Deed of indemnity in a share purchase agreement protects the buyer against undisclosed tax liabilities relating to the period before the sale. A tax covenant acts as a promise by the seller to pay the buyer an amount equal to any tax liability that was not reflected in the completion accounts. This document is the primary tool for allocating tax risk between the parties in a corporate exit.
It ensures the buyer receives the company in the financial state they paid for.
Indemnity Scope
Coverage extends to actual tax charges and the loss of specific tax reliefs or attributes. The covenant usually covers the period from the last audited accounts up to the date of completion. This protection is necessary because tax audits can occur years after a transaction finishes.
Sellers are held liable for taxes that arise from pre-completion profits regardless of whether the liability was known at the time of signing.
Claim Procedure
Precise rules govern how the buyer must notify the seller of a potential claim from the tax authorities.
Specific Exclusion
Sellers negotiate for limits on their exposure such as a time bar or a minimum claim value. Carve outs usually apply to taxes resulting from actions taken by the buyer after the closing date. These boundaries prevent the buyer from benefiting from their own post completion tax planning.
