Singapore - Tax impact on warranty clauses | KPMG | GLOBAL

Singapore - Tax impact of warranty clauses

Singapore - Tax impact of warranty clauses

Tax impacts of warranty clauses in Singapore.

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

Yes, usually the Sale and Purchase Agreement (“SPA”) would have provisions for warranties and indemnities.

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

No, rather the tax treatment would depend on whether the indemnity payment or purchase price adjustment is income or capital in nature.

As there is no capital gains tax in Singapore, indemnity payments or a reduction of the purchase price would not result in any capital gains tax implications.

Exception: if the buyer or seller is in the business of trading shares, indemnity payments or adjustments made to the purchase price are likely to be income in nature. Consequently, any gains realised from a price adjustment would be taxable, while losses would be tax deductible.

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

Yes, the classification is relevant but for tax purposes it usually has no impact.

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)?

This is not a common practice in our experience.

Is the classification usually mentioned in the SPA?

N/A*

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

No based on our experience.

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

Standard warranties and indemnities are usually found in a SPA to cover historical risks, which have not been provided for in the purchase price upon completion e.g. either as a liability or a reduction in assets.

A liability cap is often found in relation to risks that are not identifiable at the time of purchase. There is usually an expiry of warranties and indemnities included, sometimes in line with statutory time bar periods.

It is common for a seller to include knowledge caveats / qualifiers in the SPA, to limit their liability in the event of a breach of warranty.

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

It is very rare to have standalone tax warranty agreements.

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)?

We have seen gross up indemnity clauses but not as much as net payments.

Acquirer

  Corporate Income Tax Personal Income Tax

Price reduction clause 

(please also refer to our comments in .2 above)

The price adjustment has no direct impact on the taxable income of the purchaser* *. The price adjustment has no direct impact on the taxable income of the purchaser**.

Indemnification clause

(please also refer to our comments in no.2 above)

The tax treatment of an indemnity receipt will depend on whether it relates to recovering an amount that is income (taxable) or capital / non-deductible (non-taxable) in nature.

E.g. tax paid is not tax deductible, hence recovered amounts would not be taxable. Conversely, trade items are usually subject to tax, hence recovering a loss that is tax deductible, would be taxable in the hands of the recipient.

Vendor

  Corporate Income Tax Personal Income Tax

Price reduction clause

(please
also refer to our comments in .2 above)

No tax consequences.

However, if the Vendor is in the business of trading shares, any loss could be used to offset taxable gains from the sale of shares.

No tax consequences.

However, if the Vendor is in the business of trading shares, any loss could be used to offset taxable gains from the sale of shares.

Indemnification clause

(please
also refer to our comments in .2 above)

The tax treatment of an indemnity payment (whether it is tax deductible) will depend on whether it relates to an amount that is income (deductible) or capital (non-deductible) in nature.

Target

Price reduction clause N/A*

*Non-available
**Because, there is no capital gains tax in Singapore.

Chiu Wu Hong – KPMG in Singapore

Head of Tax and Head of Enterprise

Tel: (+)65 6213 2569

wchiu@kpmg.com.sg

Simon Clark – KPMG in Singapore

Regional Tax Partner and Head of M&A Tax

Tel : (+)65 6213 2152

simonclark1@kpmg.com.sg

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