France - Tax impact on warranty clauses | KPMG | GLOBAL

France - Tax impact of warranty clauses

France - Tax impact of warranty clauses

Tax impacts of warranty clauses in France.

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Eiffel Tower France

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

Yes, the seller grants warranties or indemnities to the purchaser when acquiring a company.    

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

Yes, the tax treatment of the warranty depends on its legal classification.

If the warranty is considered as a reduction of the purchase price, it has an impact on the capital gain/loss for the seller and on the acquisition price of the shares for the purchaser. On the contrary, if the warranty is considered to be an indemnity, it should have an impact on the taxable income of the seller and the purchaser.

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

Yes, the classification of the clause (price reduction or indemnity) is relevant for tax purposes. Indeed, the tax treatment depends on the type of warranty granted. If a warranty is classified as a price reduction clause, it should have an impact on the capital gain/loss; if classified as an indemnity, it should have an impact on the taxable income.   

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)?

Mixed clauses are very rare in practice.  

Is the classification usually mentioned in the SPA?

Yes, it is. Most SPAs provide for a classification of the type of the warranty.   

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

Yes, there are criteria to distinguish between a price reduction clause and an indemnity clause. Indeed, if the beneficiary of the clause is the purchaser, the clause is likely to be a price reduction clause; if the beneficiary is the target, the clause is likely to be an indemnity clause.  

Moreover, if the warranty payments are not limited by a cap, the warranty should be classified as an indemnity. If there is a cap on the warranty payment, e.g. generally the purchase price of the shares, the warranty could be a price reduction clause.

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

It is market practice to have a price reduction clause set up in the SPA.  

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

No, it is normally part of the SPA, sometimes as an appendix.   

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 payment is treated as taxable income. 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.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment is treated as a non-deductible capital loss. In the rare case where the capital gain is taxable, the price adjustment could be tax deductible (capital loss). The capital gain, if any, will be reduced by the indemnity.
Indemnification clause The indemnity is tax deductible. The capital gain, if any, will be reduced by the indemnity.

Target

Price reduction clause No tax consequences: the indemnity payment is treated as taxable income if related to a damage which is tax deductible. If the damage is not tax deductible, the indemnity is tax exempt.

Contacts

Mikaël Maheust

FIDAL, Paris

Partner

Tel : +33 (0)1 47 38 88 98

Mikael.maheust@fidal.com

Louis-Emmanuel Ruggiu

FIDAL, Paris

Senior Manager

Tel : +33 (0)1 55 68 16 35

Louis-emmanuel.ruggiu@fidal.com

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