Belgium - Tax impact on warranty clauses | KPMG | GLOBAL

Belgium - Tax impact of warranty clauses

Belgium - Tax impact of warranty clauses

Tax impacts of warranty clauses in Belgium.

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Does the seller grant warranties or indemnities to the purchaser when acquiring a company?

Yes, a purchaser only has limited protection and therefore SPAs generally include representations and warranties/indemnities.    

Does the tax treatment of the warranty depend on its legal classification (e.g. indemnity vs. reduction in the purchase price vs. others)?

Yes, a different tax treatment may apply to warranties depending on their classification. A price reduction should follow the tax regime applicable to share transactions (i.e., gains on shares are generally tax exempt or subject to a 0.412% tax; whereas losses on shares are not tax deductible). An indemnity can be treated differently, i.e. deductible for the payer and taxable for the beneficiary, depending on the characteristics of the clause.    

Is classification of the contractual warranties as a price reduction clause or an indemnity clause relevant in your jurisdiction?

Yes. Warranties and indemnities are typically treated as price adjustments under the SPA pursuant to a specific clause. Furthermore, according to an opinion issued by the Belgian commission for accounting standards, indemnities should be treated in the same way as price reductions for accounting purposes if the sale price of the shares is determined taking into account the warranties given by the parties (which could generally be the case).   

Are mixed clauses included in the SPA (for instance, a warranty drafted partially as a price-reduction clause for the portion corresponding to the purchase price and as an indemnity clause for the amount exceeding the purchase price)?

No mixed clauses in the SPA.  

Is the classification usually mentioned in the SPA?

Yes, it is.   

Are there criteria to distinguish between a price reduction clause and an indemnity clause? Could you briefly describe these criteria?

First, if the purchaser is the beneficiary, the clause can be classified as a price reduction. If the target-entity is the beneficiary, the payment will rather be classified as an indemnity. Second, a price adjustment clause on itself is limited to the value of the sale. If this is not the case, or if there is no limitation of the warranty, this may be an indication that there is an indemnity in the strict sense.

Furthermore, if the SPA refers to a definitive and unchangeable price for the transaction, the payment would be classified as an indemnity. The inclusion of a clause (or at least the reference to it) under the section concerning the determination of the price would rather lead to a classification as a price reduction. Finally, if the warranty is agreed upon after the SPA and is not included as an addendum to the SPA, the classification as a price reduction could be jeopardized.  

What is the most common type of warranty in your jurisdiction?

The most common type of warranty is the price reduction clause. Indeed a payment for a breach of warranties and an indemnity payment are both typically treated as a price reduction.  

Is a tax warranty usually provided by way of a separate warranty agreement (different from the SPA)?

No. It occurs more frequently if one of the parties is non Belgian. However, there is a market trend towards a general tax indemnity for all tax risks in combination with a set of tax warranties.  

Is it usual / a market practice to negotiate after-tax settlements, i.e. to reduce the price adjustment to a net payment (i.e. indemnity minus the tax effect of the deduction for the acquirer or target) or to guarantee full indemnification (i.e. gross-up payment to guarantee a net indemnity)?

Yes, it is common. Typically if there is a gross-up obligation, the settlement will also be after tax (balanced approach).   

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares. Consequently, future capital gains will be increased. In Belgium, gains on shares are generally tax exempt or subject to a 0.412% tax. Generally no impact
Indemnification clause If the indemnity is not structured as a price reduction in the SPA, it may be taxable. Elements indicating that the payment may be treated as an indemnity and not a price reduction are the following: Absence of limitation of the warranty (i.e. the payment is not limited to the value of the sale); The SPA refers to a definitive and unchangeable price for the transaction: The warranty is agreed upon after the SPA and not included as an addendum to the SPA. Generally no impact

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment has no direct impact on the taxable income of the vendor. It is treated as a decrease in the investment value of the shares. Consequently, capital gains are decreased (capital losses are not deductible). Generally no impact
Indemnification clause If the indemnity is not structured as a price reduction in the SPA, it may be deductible. Elements indicating that the payment may be treated as an indemnity and not a price reduction are the following: Absence of limitation of the warranty (i.e. the payment is not limited to the value of the sale); The SPA refers to a definitive and unchangeable price for the transaction: The warranty is agreed upon after the SPA and not included as an addendum to the SPA. Generally no impact

Target

Price reduction clause Payments received are taxable.

Contact

Hannes Laloo 

KPMG in Belgium

Director

Tel : + 3227083987

hlaloo@kpmg.com
 

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