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Stipulations of case law regarding the so-called “tax clauses”

Tax clauses are an integral part of company acquisition agreements. Tax clauses are often used to agree which of the parties to a legal transaction will bear the taxes arising from that transaction in economic terms or in the light of civil law (tax burden clause).
Somewhat different are clauses that make the effectiveness of a contract in terms of civil law conditional on a specific tax treatment procedure agreed by the parties or the occurrence of a specific tax consequence (tax effect clause). Finally, clauses that can be described as tax avoidance clauses are aimed at designing a transaction in such a way that tax is not incurred or a certain tax treatment procedure does not take place. Alongside these clauses, contracts often include arrangements concerning price adjust­ments, rights to obtain/duties to provide informa­tion, rights/duties to cooperate, maximum liability amounts, statute of limitations rules or payment dates.

Use of the clauses in the light of civil law

The question of how tax clauses are implemented in civil-law contracts largely depends on the pur­pose pursued. Arrangements regarding informa­tion rights or payment dates, for example, are simply made by incorporating a relevant contrac­tual provision. If, on the other hand, the tax clause concerns the payment of taxes by one of the par­ties or their avoidance, independent guarantees are usually used in practice (especially in company acquisition agreements). In addition, simple in­demnities or their mixed forms are common, and tax clauses can also take the form of legal covenants.

Tax effect clauses

There is virtually no case law on the effectiveness or consequences of tax clauses. Many occurring problems and cases of liability are solved in a strictly practical manner or in line with commercial principles. Nevertheless, the following should be noted:
The landmark ruling of the German Federal Fiscal Court (Bundesfinanzhof, BFH) of 24 November 1992 on this matter, which dealt with a tax clause in the narrow sense that turned out to be ineffective and, thus, fell short of its purpose, was astonishing in that it expressly left two obvious basic questions unanswered: The Court did not consider or find a solution to the conflicting approaches as regards the civil law nature of tax clauses that were discussed in the literature up to the time of the ruling, nor did it answer the question of whether a tax clause agreed in a legal transaction was also effective under tax law. Instead, the Court stated only that a tax clause agreed in a specific case had to be notified to the tax office “as soon as possible” if the parties wanted to rely on it”. However, this statement should be approached on a case-by-case basis as every case is different; furthermore, the Court was supposed to rule on a tax effect clause.
Only in the case of such clauses, but not, for example, in the case of tax burden clauses, can the tax authority therefore invoke the prohibition of inconsistent behavior because only in their case can the tax clause have a third-party effect”. In the case of a land purchase agreement, for example, it would make no sense to make the possibility of relying on the tax clause conditional on a notification to the tax authorities, because Article 13 no. 1 of the German Real Estate Transfer Tax Act (GrEStG) ensures that the tax may be claimed both from the seller and from the buyer. Thus, in my opinion, the Federal Fiscal Court addresses in its case law neither tax burden clauses, which only allocate the responsibility for undisputed tax claims that already exist, nor tax avoidance clauses.

Tax avoidance clauses

Tax avoidance clauses aim to prevent a certain tax consequence from occurring. Already in the 1980s, the Federal Fiscal Court considered such tax clauses as generally permissible, saying in my opinion correctly that they do not constitute tax abuse within the meaning of Article 42 of the German Fiscal Code (Abgabenordnung, AO). The justification was that the resulting legal clarity was also in the interest of the party entitled to levy the tax (federal, state or local government).
But courts make an exception from this principle in cases where tax avoidance is in conflict with the mandatory provisions relating to balance sheets for commercial purposes and the tax balance sheet regulations. The prime example are tax clauses according to which any payments received by a shareholder must be returned if during an external tax audit tax inspectors come to conclude that a hidden profit distribution was made. According to case law, such clauses are not permissible as they are used to annul the tax treatment of the hidden profit distribution. Only the civil-law aspects can be designed in the contract but not the taxable event itself as it is not subject to the principle of party disposition.
Another example of an exception, according to case law, are cases in which tax law deviates from the principles of civil law, be it due to the beneficial ownership approach laid down in Article 39 of the German Fiscal Code (AO) or due to a different definition of terms in tax laws. In this case, it is not possible to use a contractual clause to give a tax term a different meaning under civil law.

Tax burden clauses

The permissibility or consequences of tax burden clauses, i.e. clauses which allocate the tax burden resulting from a legal transaction to one of the parties to that transaction, have, as far as can be seen, not been addressed in tax case law rulings. According to what has been said about tax avoidance clauses, such clauses are in my opinion subject to the general rules of civil law and can therefore be freely agreed within the framework of private autonomy. They do not affect, change or negate the taxable event, which is why there is no need for tax law to regulate them. However, tax burden clauses have occasionally been the subject of case law of the civil courts, albeit with a completely different focus. For example, in insurance law, the so-called value added tax clause, according to which value added tax is only reimbursed by the insurer if it has actually been paid, was declared invalid because the clause was considered surprising. Since company acquisition agreements are usually drafted and negotiated on an individual basis, this hurdle should be easy to overcome.


Tax clauses in company acquisition agreements are mostly clauses with which the tax burden arising from a transaction is allocated among the parties (the so-called tax burden clause). This usually does not pose any problems. On the other hand, increased attention should be paid in the case of clauses with third-party effect where the tax authorities are such a third party, and in the case of retroactive clauses as well as clauses whose stipulations deviate from mandatory tax law provisions.

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