With a clean finding, targeted warranties may be enough.
If due diligence and tax accounts are clean, targeted warranties and normal information duties may be sufficient.
Open periods and known audit points should still be disclosed expressly.
Agreement & warranties
Tax indemnity and tax covenants in a business acquisition
Tax indemnity in a business acquisition: allocate audit risks, pre-closing taxes, indemnity and purchase price mechanics clearly.
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4 July 2026 · Mag. Bernhard Brandauer, Rechtsanwalt
Tax is not a side issue in a business acquisition. Unclear VAT, payroll taxes, corporate income tax, hidden distributions or open audits can change the economic value of a deal after closing.
A tax indemnity allocates these risks to the correct period and party. It separates purchase price, warranties, disclosure and cooperation in later tax proceedings.
This post complements the due diligence checklist and the disclosure letter. The focus is not tax calculation, but contractual risk allocation.
Assess the transaction
Assess tax risks in the deal
Answer two questions on the starting point and contractual readiness.
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Are there open tax years, audits or unclear cut-off issues before closing?
Tax risks often relate to pre-closing periods but become visible only later through assessments or audits.
All paths at a glance
Overview of all answers.
A concrete tax indemnity allocates risks for tax and contract purposes.
A concrete tax indemnity defines covered taxes, periods, exceptions, procedure and cooperation. It clarifies which pre-closing burdens remain with the seller.
The clause should match the price mechanics and disclosure letter.
General tax clauses leave later audits unresolved.
If the seller merely warrants general tax compliance, procedural rights, time logic and exceptions are often missing. Enforcement becomes harder.
Refine tax types, periods and cooperation duties before signing.
Which tax risks arise in transactions
Which tax risks arise in transactions
In a share deal, tax risks of the company generally remain in the target. A later tax audit may therefore concern years for which the seller was economically responsible. In an asset deal, different cut-off issues arise, including VAT, payroll taxes or liabilities that transfer with the business.
Legal and tax detail review belongs in due diligence. The purchase agreement must then state clearly who economically bears which risk and how later assessments, claims or appeals are handled.
How tax indemnity and warranties interact
How tax indemnity and warranties interact
Tax warranties describe a target state, such as filed returns, paid taxes or no known disputes. A tax indemnity goes further: it requires reimbursement for certain tax liabilities economically attributable to a pre-closing period.
Exceptions are important. Not every later tax burden should automatically be borne by the seller, for example where it is triggered by buyer actions after closing or was already reflected in the purchase price.
Review points
Allocate tax risks contractually
The table shows which points tax indemnity and warranties should cover.
| Point | Why it matters | Contract solution |
|---|---|---|
| Period Period | Before or after closing | Period allocation |
| Tax type Tax type | VAT, payroll taxes, income tax | Definition in SPA |
| Known issues Known issues | Audit or assessment | Disclosure letter |
| Procedure Procedure | Who conducts appeals? | Cooperation rules |
| Purchase price Purchase price | Risk already priced? | No double recovery |
Caution: Tax clauses should not be copied in isolation from tax adviser wording. The key question is whether they are enforceable in the purchase agreement and fit price, disclosure and liability caps.
Procedural rules for audits and assessments
Procedural rules for audits and assessments
The clause should regulate who is informed, who cooperates, who files statements and who decides on appeals. Without such rules the buyer may run a procedure whose economic result the seller should bear, without sufficient control.
Deadlines should not be guessed schematically. Tax procedural periods depend on tax type, assessment and procedural stage. The contract should therefore link information and cooperation duties to actual notices and authority steps.
FAQ
Common questions on this topic.
Is a tax indemnity needed in every deal? +
Not always. The more complex the tax history, group structure or open audits are, the more important a separate indemnity becomes.
Does a tax indemnity replace tax due diligence? +
No. Due diligence identifies the risks. The tax indemnity then allocates who should bear specific risks economically.
Which deadlines apply to tax claims? +
That depends on tax type, assessment and procedure. Therefore no blanket deadlines should be assumed; actual notice, information duties and appeal strategy matter.
Further reading
Further topics on business acquisition
Topics
Tax indemnityTax covenantsSPADue diligenceBusiness acquisition
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