Mexico - Tax impact on warranty clauses | KPMG | GLOBAL

Mexico - Tax impact of warranty clauses

Mexico - Tax impact of warranty clauses

Tax impacts of warranty clauses in Mexico.

1000

Related content

Top view of mexico city

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

Yes, as long as there is a result from prior tax/financial due diligence contingencies that were identified. Consider that usually the identified contingencies result in a reduction in the purchase price.

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

Yes depending on each transaction and how it is agreed to be conducted after the acquisition. e.g. in principle the tax burden may be reduced if the purchase price decreases (different to an indemnity which in México may be considered as not deductible).

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

Yes, from the classification of each warranty depends on the tax treatment. Everything depends on (i) whether the “Warranty” is considered as part of the price share purchase price or (ii) whether it is only a “Warranty” that the seller will receive if the contingencies are detected or not and, if so, claimed by the Tax Authorities.

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)?

Such mixed clauses are not often included in the SPA.

Is the classification usually mentioned in the SPA?

Yes, the classification is usually mentioned in the SPA.

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

If the warranty protects the buyer from a tax contingency, usually it is not part of the purchase price, and then it would be considered as non-taxable.

In case of an escrow that will be paid to the seller (as part of the purchase price) as long as the tax authorities do not identify the tax contingencies identified as a result of the due diligence, then such escrow will be subject to taxation in Mexico.

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

Usually (considering the tax contingencies and the adjustments to the EBITDA) the purchase price is reduced including a simple indemnity which protects the buyer from future tax liabilities (without receiving an additional amount as part of the purchase price), nevertheless other warranties such as an escrow are considered.

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

No, it is usually included in the SPA.

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)?

No it is not a market practice in Mexico.

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 It depends on the classification of the indemnity. If such indemnity is part of the methodology to compute the purchase price, then it is treated as an increase in the investment value of the shares and then taxable. If the indemnity is paid to the seller in order to comply with tax liable responsibilities, then it would not increase the investment value. It depends on the classification of the indemnity. If such indemnity is part of the methodology to compute the purchase price, then it is treated as an increase in the investment value of the shares and then taxable. If the indemnity is paid to the seller in order to comply with tax liable responsibilities, then it would not increase the investment value.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment impacts directly on the capital gain realized. As the price is lower, the capital gain is decreased and then the tax burden may be decreased also. The price adjustment impacts directly on the taxable capital gain that may result as a consequence of the alienation of the shares. As the price is lower, the capital gain is decreased and then the tax burden may be reduced.
Indemnification clause If as a result of an analysis it is concluded that the indemnity is not part of the purchase price, then it is not taxable. Usually, if an indemnity is paid to cover tax liabilities, or other concepts, then they are not deductible. If as a result of an analysis it is concluded that the indemnity is not part of the purchase price, then it is not taxable. Usually, if an indemnity is paid to cover tax liabilities, or other concepts, then they are not deductible.

Target

Price reduction clause N/A*
Indemnification clause N/A

*Non-available

Contact

Carlos Vargas - KPMG in Mexico

Partner in charge of the M&A Tax practice

Tel : (+)52 (55) 5246 8485

carlosvargas@kpmg.com.mx

Pablo Rodrigo Velázquez - KPMG in Mexico

Manager, M&A Tax practice

Tel : +52 (55) 5246 8437

rodrigovelazquez@kpmg.com.mx

Connect with us

 

Request for proposal

 

Submit