Spain - Tax impact on warranty clauses | KPMG | GLOBAL

Spain - Tax impact of warranty clauses

Spain - Tax impact of warranty clauses

Tax impacts of warranty clauses in Spain.

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

Yes. However, in practice, there are cases (mainly in transactions where the seller is a private equity firm) where the seller is not willing to provide any warranties and indemnities, and the purchaser needs to take that into account when making the price offer.

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

No, the tax treatment of the warranty/indemnity follows the accounting treatment. From an accounting point of view, it is possible to make price adjustments, but only during the year following the date of the transaction.

Consequently, any indemnity will be considered as taxable income for the purchaser. A price adjustment will be considered as taxable income for the purchaser unless the adjustment was made during the first year after the transaction took place.

N.B.: Due to recent changes in the accounting and tax treatment of price adjustments and in the tax treatment of the sale of subsidiaries, the tax treatment of this payment has not yet been confirmed with the Tax Authorities.

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

Not anymore. Indeed, as a consequence of the one-year period for making price adjustments that is currently applicable, the classification is not very relevant now. However, before year 2010, there was a possibility to make price adjustments without any time limit.

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)?

See above – response to question n°3.

Is the classification usually mentioned in the SPA?

Yes.

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

Generally, all warranties are treated as an indemnity clause. However, a clause could expressly mention the classification of a price reduction. As a general criterion, the indemnities cannot exceed the purchase price.

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

An indemnity clause is the most common, but it is not rare to see price reduction clauses.

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

Tax warranties are usually provided in the SPA. Sometimes they are provided by way of a separate warranty agreement, when the tax warranties provide/contain sensitive/confidential information.

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.

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause

The price adjustment is treated as taxable income, except if made during the year following the date of the transaction if

  1. the SPA expressly mentions that the payment will be a reduction of the price, and 
  2. a liability is recorded in the acquirer’s account for the expected payment. If the payment is not made, the elimination of the provision would create a taxable income.
Tax treatment is unclear (no case law/tax ruling available). If the SPA expressly drafts the payment as a reduction of the price, it might be possible to treat the payment as a decrease in the investment value of the shares, and therefore future capital gains would be increased. If the SPA does not draft the payment as a reduction of the price or if the tax authorities qualify the payment as an indemnity, the payment would lead to a taxable capital gain.
Indemnification clause The indemnity payment is treated as taxable income. The indemnity payment is treated as taxable income.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause If the price adjustment is considered as a reduction of the purchase price, that would produce a non-deductible loss unless the reduction implies a net loss in the sale of the participation. Tax treatment is unclear (no case law/tax ruling available). If the SPA expressly drafts the payment as a reduction of the price, it might be possible to treat the payment as a decrease in the transfer value of the shares. If the SPA does not draft the payment as a reduction of the price or if the tax authorities qualify the payment as an indemnity, the payment would lead to a capital loss.
Indemnification clause The indemnity payment is treated as a capital loss. The indemnity payment is treated as a capital loss.

Target

Price reduction clause The payment and the indemnity payment is treated as taxable income.

Contact

Alvaro de Silva Urquijo – KPMG in Spain

Director, Deal Advisory, M&A Tax

Tel : +34 91 456 34 62

asilva@kpmg.es

 

Carlos Marin Pizarro – KPMG in Spain

Partner, Deal Advisory, M&A Tax

Tel : (+)34 91 456 59 62

carlosmarin@kpmg.es
 

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