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published on 20 January 2023 | reading time approx. 3 minutes
In M&A transactions it is common that the buyer and the seller have different visions as regards the future development of the target company. In order to reconcile the differing visions, the parties may agree on a so-called earn-out clause. Closely connected to the structuring of an earn-out clause is the question of the timing when the seller will have to tax subsequent purchase price payments made on the basis of an earn-out clause and when the buyer will be able to claim subsequent acquisition costs for tax purposes.
Unlike the seller, the buyer is usually interested in using the costs incurred as part of the transaction as quickly as possible in the form of write-off potential for future periods. Therefore, the benefit for the buyer will sometimes depend on whether the M&A transaction is structured as an asset deal or as a share deal. In particular in the case of an asset deal the question arises, apart from the allocation of subsequent purchase price payment to the existing business assets, at what point in time due to subsequent purchase price payments the depreciation basis for the acquired business assets should be increased and the related further write-off potential will unfold. In tax literature, most authors are of the opinion that in particular with earn-out payments that depend on sales revenue and/or profit such costs may not be taken into account as subsequent acquisition costs until the time of payment, i.e. when the conditions for earn-out payments are met. In contrast, a minority of authors assume a corresponding treatment of the acquisition costs as capital gains.
Earn-out clauses in a purchase agreement enable both the seller and the buyer to agree on a purchase price, especially in a situation where they have different visions of the development of the target company. The specific structuring of an earn-out clause as a purchase price mechanism entails possible tax consequences. Here, it should be verified already at the transaction level to what extent the timing of taxation of subsequent purchase price payments may be structured in the contract.
Michael Wiehl
Partner
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