Netherlands - Tax impact on warranty clauses | KPMG | GLOBAL

Netherlands - Tax impact of warranty clauses

Netherlands - Tax impact of warranty clauses

Tax impacts of warranty clauses in Netherlands.

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

Yes, it is standard practice (only in case of potential risks obviously).

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

Generally yes, the legal classification prevails for tax purposes, but based on case law there are situations where an indemnity could be reclassified as a reduction in the purchase price. Whether the situation is an indemnity or a reduction in the purchase price should in principle have the same consequences from a tax perspective, except for some slight differences.

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

Yes.

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, we consider it likely that mixed clauses can be included in the SPA but not seen in practice. What we do see in practice is clauses that include a warranty and an indemnity and that the purchaser can either invoke the warranty or the indemnity, or alternatively the SPA indicates in which case the warranty applies and in which case the indemnification applies.

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?

Yes. The classification is relevant for tax purposes. An indemnity may be exempt under the participation exemption. Also, a price reduction should not have adverse consequences, so generally the same consequences. However upon liquidation there are circumstances where a loss upon liquidation may become deductible and such loss would be less important in case of a price reduction (i.e. the higher the cost price, the higher the loss upon liquidation).

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

The most common type of warranty is the price reduction clause.

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

No, it could be included in Schedules/Appendix to 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)?

Yes this is generally market practice, i.e. full indemnification, euro for euro.

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. Possible lower (deductible) liquidation loss in case of liquidation in the future. Reduction in purchase price in itself would not have direct consequences, but would increase potential capital gains, which may become subject to personal income tax in case of Dutch residency.
Indemnification clause Indemnification would in principle qualify as a reduction in the purchase price (i.e. not taxable). However, there may be circumstances in which the indemnification may qualify as taxable income which should then be exempt provided participation exemption applies. Indemnification would in principle qualify as a reduction in the purchase price (i.e. not taxable). However, there may be circumstances in which the indemnification may qualify as taxable income.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause Reduction in purchase price in itself would not have direct consequences, would decrease capital gain / increase capital loss. If participation exemption applies, gain would be exempt / loss would be non-deductible. Decrease in purchase price, i.e. lower (taxable) capital gain or higher (deductible) capital loss.
Indemnification clause Indemnification would in principle qualify as a (non-deductible) reduction in the purchase price, so lower capital gain. However, there may be circumstances in which the indemnification may qualify as a (non-deductible) expense (provided the participation exemption applies). Indemnification would in principle qualify as a (non-deductible) reduction in the purchase price, so lower capital gain. However, there may be circumstances in which the indemnification may qualify as a (deductible) expense.

Target

Price reduction clause The payment, if received by the target, is not treated as taxable income. It is an informal capital contribution which is not taxable.

Contact

Bernard Van Gerrevink – KPMG in the Netherlands

Senior Manager – Dutch Tax Desk Paris

Tel : +33 (0) 1 55 68 16 84

vangerrevink.bernard@kpmg.com

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