A tax indemnity agreement is a legal document that can be used in business transactions to protect one party from potential tax liabilities. In simple terms, it is an agreement where one party agrees to indemnify the other party against any tax-related losses or liabilities that may arise in the future.
These agreements are commonly used in mergers and acquisitions, where the buyer assumes ownership of the assets and liabilities of the target company. The tax indemnity agreement helps to safeguard the buyer against any unknown taxes or liabilities that may surface after the deal has been completed. This is especially important when dealing with large transactions, where the tax liabilities or litigation costs can be significant.
The agreement will outline the scope of the indemnity, the types of taxes covered, and the time frame in which the indemnity will apply. Typically, the indemnity will cover all taxes arising from any pre-acquisition or pre-closing period, even if they were not previously disclosed. It may also cover taxes related to any breaches of representations or warranties made by the seller.
It is important to note that tax indemnity agreements are not a substitute for proper due diligence. The buyer should still conduct a thorough review of the target company`s tax history and potential liabilities. However, the agreement provides an additional layer of protection for the buyer.
The benefits of a tax indemnity agreement are not limited to the buyer alone. The seller also benefits from the agreement, as it can help to facilitate a smooth transaction and reduce post-closing disputes. By agreeing to indemnify the buyer against tax liabilities, the seller is incentivized to disclose all relevant information upfront, as any incorrect or incomplete information could result in a breach of the agreement.
In conclusion, a tax indemnity agreement is a valuable tool in protecting both the buyer and seller in business transactions. It provides an additional layer of protection against unknown tax liabilities and helps to facilitate a smooth transaction. However, it is important to conduct proper due diligence and seek professional advice before entering into any such agreements.