Stock Purchase Agreement Tax Provisions

December 17, 2020 – 10:41 pm

Typically, the closure takes place in the middle of the target fiscal year. This is commonly referred to as the “straddle period.” The Straddle period raises a number of administrative issues that buyers and sellers should agree and commemorate in the sales contract. One of the administrative issues is whether the acquisition results in the end of the target tax year, who pays the tax payable, who is responsible for filing periodic returns, how any refunds are handled and who performs all tax checks before the end of tax periods. Early treatment of tax issues in the deal process can save the parties money, as a tax restructuring of the agreement can result in delays and additional consulting costs. The early inclusion of tax specialists in the deal process can help parties identify and negotiate consensual tax provisions in a timely manner. [4] If the seller is responsible for an unexpected tax liability during a clearing period, he should also be entitled, by symmetry, to unexpected tax refunds relating to the advance period. This is usually reflected in a self-repayment provision in the sales contract. The tax provisions contained in a business purchase contract can generally be classified as tax guarantees and guarantees, tax pacts, compensation and survival clauses and tax definitions. The guarantees and assurances provided by the seller are intended to ensure that the company has, in general, fulfilled its tax obligations in accordance with the rules in force. In theory, it may seem sufficient for the buyer to prove that the seller does not respect the general guarantee that the company has calculated and paid, as required by tax rules.

The tax issues raised when buying a capital company can be quite complex. Since a company remains subject by law to the conclusion of a tax position, a diligent investor will try to understand target`s tax history and protect itself by the sales contract. An experienced tax expert can help a buyer analyze a goal`s tax returns and negotiate the tax arrangements necessary to meet the buyer`s needs. [2] Mechanically, this final adjustment will only take place after closing – usually between 60 – 90 days – as soon as a full calculation can be made at the deadline. It is also not uncommon for a new interim adjustment to be made, using an estimate of the working capital expected on the reference date to determine the purchase price to be paid at closing, so that the final working capital adjustment (again generally 60 – 90 days after closing) is smaller.

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