Finland - Tax impact on warranty clauses | KPMG | GLOBAL

Finland - Tax impact of warranty clauses

Finland - Tax impact of warranty clauses

Tax impacts of warranty clauses in Finland.

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

Normally yes. However, if the seller is a private equity house, warranties and indemnities may not be given.    

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

If the warranties are settled between the buyer and the seller, it should have an impact on the purchase price and, hence, they have an impact on the capital gain/loss and acquisition price of shares. However, if the warranty is paid to the target (which is not a common procedure), it would most probably be taxable income for the target.    

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

Varies case by case and is always subject to negotiation between the parties. Normally parties agree that they have an impact on the price.   

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)?

Yes, mixed clauses are included in the SPA. Often sellers require a cap on the price adjustment, so that their liability is limited to e.g. 20-50% of the purchase price. Taxes are sometimes excluded from the cap.  

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?

No specific criteria.  

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

Normally a price reduction clause, but varies case by case.  

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

No, normally part of the SPA; sometimes as an appendix. Side letters are rare.  

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 normally/quite often the net impact is noted in the SPA.   

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. 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.
Indemnification clause The indemnity should be structured in the SPA so that the price adjustment would not have a direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment of the value shares. Consequently, the future capital gain will be increased. The indemnity should be structured in the SPA so that the price adjustment would not have a direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment of the value shares. Consequently, the future capital gain will be increased.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause Indemnification payments should be classified as an adjustment to the cost base of the shares sold. Consequently any capital gains would be decreased. Indemnification payments should be classified as an adjustment to the cost base of the shares sold. Consequently, any capital gains would be decreased.
Indemnification clause Indemnification payments should be classified as an adjustment to the cost base of the shares sold. Consequently any capital gains would be decreased. Indemnification payments should be classified as an adjustment to the cost base of the shares sold. Consequently, any capital gains would be decreased.

Target

Price reduction clause Payments received are taxable

Contacts

Jaakko Jarvinen

KPMG in Finland

Senior Manager

Tel : 358 20760 3919

jaakko.jarvinen@kpmg.fi

Jyrki Holla

KPMG in Finland

Partner

Tel : 358 20760 3242

jyrki.holla@kpmg.fi

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