Tax warranties on a share sale

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Tax warranties on a share sale
  • What is a warranty?
  • Supporting due diligence
  • Legal protection: pre-completion periods
  • Making a claim for breach of contract
  • Seller protections and disclosure
  • Claims under the tax covenant
  • Legal protection: post-completion periods
  • Tax treatment of payments for breach of warranty

Tax warranties on a share sale

When a person (the Buyer) buys a company, rather than the assets of a business, all of the historic liabilities of that company and its subsidiaries (referred to in this Practice Note as ‘the Company’) are also acquired.

The Buyer of the share capital of the Company will normally expect to obtain the dual protection afforded by a suite of warranties relating to tax and a tax covenant from the current owner of those shares (the Seller). The precise nature and extent of protection obtained will, of course, depend upon the negotiating power of the parties.

There are broadly three main justifications for a Buyer to include tax warranties in a share purchase agreement (SPA):

  1. to elicit information by informing and supporting the due diligence exercise

  2. to provide protection for unknown tax liabilities of the Company relating to periods before the sale is finalised and the shares are transferred (known as Completion), and

  3. to provide protection for post-Completion tax liabilities of the Company which have their root cause in a pre-Completion period

For example tax warranties commonly requested by a Buyer when seeking to purchase a private company, see Precedents: Tax warranties—long form and Tax warranties—short form.

For a discussion of the rationale for obtaining a tax covenant, see Practice Note: Why have a tax covenant?

What is a warranty?

Warranties are statements of

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