Tax aspects of price adjustments in M&A transactions

Tax aspects of price adjustments in M&A transactions

Depending on the transaction subject, M&A transactions may involve either the sale of shares (known as share deals) or the transfer of specific assets individually or as an operating business (referred to as asset deals or business deals, respectively). As these two types of transaction differ, the tax aspects of adjustments to the purchase/sale price will also vary.

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The matter of correct tax treatment of the purchase price in M&A transactions is one of the most complex issue  and, as such, requires cooperation between the parties to the transaction in the legal, financial and tax aspects. Matters to be looked into may include the nature of the transaction in terms of its subject matter, or the mechanism of tax treatment of the purchase price, the time at which the value of the transaction is fixed, or the agreed price adjustments. 

Price adjustments in share deals

As regards share deals, price adjustments causing tax implications may occur even at the level of a due diligence examination. Firstly, when conducting the due diligence examination and identifying a number of tax risks, the purchaser may consider using an indemnity clause as a safeguard against the identified risks, (for a detailed discussion of indemnity clauses, see the  Warranties and indemnities in share purchase agreements article) or the mechanism whereby the payment of the price is deferred and transferred to and held in an escrow account until the conditions for releasing this part of the price are met, or adjustment of the price to reflect the value of the identified risks.

In the case of the price adjustment alternative, what is important is the value of the tax risk(s), but also, and perhaps most importantly, the likelihood of the potential risk materialising. This option is obviously not so advantageous for the seller, as the sale price is reduced. However, it allows the seller to eliminate, in advance, the risk of disputes and payments under indemnity clauses. The choice of safeguards against tax risks will depend on the type of transaction and the parties involved. Price adjustment is usually the preferred option if one of the parties is an investment fund, e.g. a private equity fund or a venture capital fund, interested in total divestment.

Another important issue on the tax side is to address elements that may affect tax liabilities later due to the differences in their treatment for accounting and tax purposes (deferred tax), e.g. amortisation/depreciation, accrued interest or unrealised foreign exchange differences. Often so called "tax assets” including for example  tax losses settled within a given source , or interest expenses that were not settled within the earnings stripping limit remain the key aspect of it. Whether and to what extent such items can be utilised by the purchaser in the future may also affect the valuation of the company for tax purposes..

In share deals, price adjustments may also depend on the moment at which the transaction price is set. Within this context, the mechanism included in the share purchase agreement will be crucial and will determine whether

  • the price will be fixed as at a specific date in the past (known as the locked box mechanism) or
  • the price will initially be fixed before the share purchase agreement is signed, based on the expected price on the date of the transaction; this initial price is later reviewed by reference to the actual figures (this is known as the completion accounts mechanism).

Potential adjustments either reducing or increasing the price, may be used in the case of the second mechanism. Correct determination of the final price under the completion accounts mechanism requires the calculation of the final price by one party to the transaction and verification of the data by the other party to the transaction from the accounting and tax perspective (based on the procedures specified in the share purchase agreement).. From the tax perspective, in addition to ensuring that the final price is based on correct balances of liabilities, it is necessary to consider the tax implications of such an adjustment.

The main problems to consider include the effect of the adjustment on the tax base for the purpose of the tax on civil-law transactions , as well as the tax point and method of recognising the adjustment for corporate tax purposes. As regards the tax on civil-law transactions, under current practice an adjustment should not affect the tax base, as the tax base is the market value set as at the transaction date, i.e. a date before the adjustment date. Regarding the corporate tax aspect, such an adjustment should generally be an element affecting the shares price in the transaction.

On the practical side, the materialisation of a specific risk which will trigger the indemnity mechanism of the purchase agreement, may also be problematic. More specifically, a situation where  the purchaser will rely on the provisions of the share purchase agreement once shares in a company have been transferred, as the basis for a compensation claim, e.g. within the framework of contractually secured risks and how the receipt of a compensation by the purchaser or a company (in which the tax risk has materialised) should be included for tax purposes..

A totally different type of adjustment of the sale/purchase price is adjustment resulting from additional payments for shares, depending on the satisfaction of certain conditions set out in the share purchase agreement. From the purchaser’s perspective a problem may arise on how to recognise such payments for corporate tax and tax on civil-law transactions purposes. In both cases, the recognition of such a payment will depend on the legal title to the payment, which will be set out in the share purchase agreement. 

Price adjustments in asset deals

Given the issue of liability of the purchaser and the fact that it is impossible to transfer tax attributes, such as tax losses, the approach to price adjustment will be different in asset and business deals . Tax adjustments for price-fixing purposes will not be as important in the course of an asset and business deal as they will be in case of a share deal. They may, however, be important when the price paid for the assets (or a business) is to be settled in line with  the mechanisms included, within the sale and purchase agreement, and may include elements that will depend on the results generated by the business over a particular period of time, e.g. as part of the earn-out clause.

Within this context, the following doubts may arise from the tax perspective: Whether such an adjustment affects the goodwill? How should such an adjustment be treated for corporate tax purposes, i.e. as the price part or as a cost/revenue item recognised in the period in which the adjustment was made? Or should the adjustment be treated as part of the price for VAT or civil-law transaction tax purposes? The contractually agreed legal titles to any such additional payment will determine the recognition of the payment. Normally, the sale and purchase agreement will provide for different legal titles to specific additional payments to ensure that the payments do not affect any previous settlements between the parties. 


The structure of the transaction according to the objectives and expectations of the parties will determine the type of price adjustments that may arise. As these matters are normally decided at the negotiation table and, finally, in the sale and purchase agreement, price adjustments can be identified in a right way only if the accounting, tax and legal issues are reviewed correctly. A certain flexibility of shaping such adjustments may have different implications on the tax side for different types of adjustment. Therefore, it is crucial to consider the tax aspects of any transaction, not only in terms of legal compliance but also on the financial side, as early as in the negotiation process for both share deals and asset deals.

Katarzyna Nosal-Gorzeń Partner in the Tax M&A Team at KPMG in Poland

Konrad Zawrotniak, Supervisor in the Tax M&A Team at KPMG in Poland

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