The following Tax practice note provides comprehensive and up to date legal information covering:
It is market practice for a tax covenant, also known as a tax deed, to form part of the transaction documents in respect of a sale of all the shares in a company (the target company) that is:
a private company incorporated in the UK, or
a non-UK incorporated private company where there is a UK connection (ie, where the buyer is UK tax resident or the share purchase agreement (SPA) is to be governed by English law)
This Practice Note explains:
what a tax covenant is
what it does—broadly, it allocates responsibility between a seller and a buyer for the tax liabilities of a target company or group by reference to a specified date, and
how payments made under it are treated for UK tax purposes
A tax covenant is an agreement that is made between the seller and the buyer, and not between the seller and the target company.
A tax covenant is a contractual promise by the seller to pay to the buyer an amount equal to any tax liability of the target company or group covered by the tax covenant. It is not a promise to pay the tax itself. Instead, it is a mechanism for shifting onto the seller the cost of such tax in accordance with the allocation made in the tax covenant.
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