Switzerland - Tax impact on warranty clauses | KPMG | GLOBAL

Switzerland - Tax impact of warranty clauses

Switzerland - Tax impact of warranty clauses

Tax impacts of warranty clauses in Switzerland.

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

Yes, the seller usually 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)?

In principle yes. The tax treatment depends on the classification.
If the warranty is considered as a reduction of the purchase price it does not have any impact on the taxable income of the acquirer and this adjustment is not deductible for the acquirer.

However, if the warranty is considered as an indemnity, this payment is taxable income for the acquirer and is generally deductible for the vendor (unless the vendor is subject to personal income tax).

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.

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)?

No, in general, warranties are drafted as price reduction clauses.

Is the classification usually mentioned in the SPA?

Yes, in particular in cases of larger transactions.

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

No specific criteria and this is analyzed on a case by case basis.

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

The most common types of warranties are:

  1. standard tax clauses,
  2. tax indemnification clauses and
  3. price reduction clauses

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)?

Yes, it is market practice to negotiate after tax-settlements.

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, the future capital gains will be increased. The price adjustment has no direct impact on the taxable income of the purchaser.
Future capital gains are in general tax free (basic principle in Switzerland in case of an individual seller).
Indemnification clause The indemnity payment is basically treated as taxable income but the acquirer should be able to treat the indemnity as a reduction of the purchase price. The indemnity is treated as taxable income.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause In general the price adjustment is non-deductible. There is no impact since capital gains are in general tax free (assuming vendor shares are privately held).
Indemnification clause The indemnity is tax deductible. The indemnity is non tax deductible.

Target

Price reduction clause N/A*

*Non-available

Contact

Claudia Schaub – KPMG in Switzerland

Director, International Corporate Tax

Tel: (+)41 58 249 30 13

cschaub@kpmg.com

 

Gernot Zitter – KPMG in Switzerland

Partner, International Corporate Tax

Tel: (+)41 58 249 67 30

gzitter@kpmg.com
 

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