Meaning
Contractual promises in a share purchase agreement protect a buyer from financial losses resulting from tax audits of intercompany transactions that occurred before the closing date. A transfer pricing indemnity ensures that the seller pays for back taxes, interest and fines assessed by government agents regarding previous valuations of affiliate deals. It shifts the risk of old pricing errors onto the parties who controlled the books at that time.
Liability Definition
Precise scope limits the indemnity to assessments directly related to the specified code sections or articles governing related-party trades. When a claim under the transfer pricing indemnity arises, the buyer typically has a duty to notify the seller immediately. Legal costs for defending the tax position are shared according to the negotiated split.
This protection remains in place for the full duration of the statutory audit window.
Threshold Provision
Caps on the total amount payable prevent the liability from exceeding the purchase price of the target. Most transfer pricing indemnity clauses include a floor amount that avoids small administrative claims. This setup keeps the focus on high-value corrections.
Deductibles are standard to ensure both sides manage the tax risk efficiently.
Escrow Lock
Portions of the sale proceeds are held in a third-party account to provide a source of cash for potential indemnity claims. The transfer pricing indemnity is worthless if the seller disappears or becomes insolvent. Having cash ready ensures the buyer is made whole without secondary litigation.
Funds release after the tax periods expire.
