Key Contacts: Michael McGivern – Head of Tax |
When a company changes hands, the tax implications are among the most important issues for both buyer and seller. The overall legal agreements will typically include tax documents, primarily tax warranties and a tax deed, designed to allocate tax risk between buyer and seller. In this article, we set out a practical overview of these documents and explain why they are essential to any share sale transaction.
The legal process typically begins with the buyer’s advisors preparing a draft Share Purchase Agreement (“SPA”) and accompanying tax documents, including a tax deed and tax warranties. The first draft will typically emphasise the buyer’s preferences, and both sides then negotiate the terms until a final form is agreed. A disclosure letter against relevant warranties is typically prepared by the seller to highlight potential problem areas where the seller is seeking protection, a due diligence exercise will likely be carried out by the buyer, and once all parties are satisfied, the documents are signed and the deal completes. Irish stamp duty is paid by the buyer on the sale of shares in an Irish company (generally at 1% on the value of the shares).
Tax Documents
Tax warranties and a tax deed sit at the heart of any share purchase transaction, and it is critical that these are prepared and negotiated carefully. Tax deeds are a feature of share sales. By contrast, in an asset sale, the buyer does not inherit the selling company’s tax liabilities and so tax warranties alone will usually suffice in such circumstances. Together, the deed and warranties allocate tax risk between buyer and seller and provide protection if unexpected liabilities emerge after the deal closes.
In short, tax warranties identify the company’s tax status and help gather essential information, while the tax deed provides euro-for-euro financial cover if pre-completion tax liabilities emerge.
Tax Warranties
Tax warranties are statements of fact given by the seller about the tax affairs of the company being sold. They serve two main purposes. Firstly they assist with gathering important historic tax information that the buyer needs to operate the company going forward, and secondly they can form the basis for allocating risk between the parties. If a warranty proves untrue and the buyer suffers a loss as a result, the buyer can sue the seller for damages.
In practice, a claim for breach of warranty would generally result in a reduction of the purchase price. This is advantageous from a tax perspective, as a payment received for breach of warranty is usually treated as reducing the base cost of the shares rather than as a taxable receipt in the hands of the buyer.
Tax Deed
The tax deed is the document that gives the buyer real financial protection, and typically provides euro-for-euro cover. Payments made under the deed are generally treated as an adjustment to the purchase price, meaning they should not give rise to a tax charge in the buyer’s hands.
The tax deed also typically sets out the practical mechanisms for dealing with claims, including how the seller must be notified, who controls any dispute with Revenue, how pre-completion tax returns are handled, and when payments fall due. The tax deed will typically include agreed limitations.
Tax Due Diligence
Before completing any acquisition, the buyer, or their advisors, should carry out a thorough tax due diligence exercise. On the acquisition of a company’s shares, the buyer will inherit the company’s liabilities, including any outstanding tax obligations. The purpose of tax due diligence is to uncover any tax issues before the deal closes, so that they can be addressed through the tax documents or reflected in the purchase price.
Key areas of focus include reviewing corporate tax filings and financial statements, examining the deferred tax provision, identifying potential clawbacks of tax reliefs, reviewing any Revenue audits or correspondence, and analysing the company’s PAYE and VAT compliance. Any risks uncovered through due diligence will inform the scope of the tax warranties and the tax deed.
Key Takeaways
It is far easier and less costly to identify and address tax issues before a deal completes than to pursue a claim under the tax deed afterwards. The tax documents in a share sale are not just legal formalities – they are the principal means of protection for both buyer and seller. Whether you are buying or selling, understanding what they cover, what they exclude, and how they interact is essential to achieving a desired outcome.
Our dedicated tax team has extensive experience advising both buyers and sellers on all aspects of tax documentation in business transactions. From efficient tax structuring and negotiating tax deeds and tax warranties to conducting thorough tax due diligence, we work closely with our clients to ensure their interests are fully protected at every stage of the deal. If you are considering buying or selling a business and would like to discuss how we can help, please reach out to us.
