Tax Treatment of Indemnification Payments

Significance

1. Insignificant
2. Moderately Material
3. Situation-Specific
4. Deal Driver

Time to Negotiate

1. Minimal
2. Moderate
3. Substantial

Transaction Cost Impact

1. Minimal
2. Moderate
3. Substantial

What It Impacts

1. Deal Value
2. Risk Assessment
3. Ability to Close

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What is Tax Treatment of Indemnification Payments? The parties use this section to address how indemnification payments will be treated for tax purposes.

The Middle Ground: This provision states that indemnification payments made under the Agreement are to be treated as an adjustment to the Purchase Price for tax purposes, so long as such treatment is allowed by law.

Purpose: This is a technical term that allows the Indemnified Party to avoid paying tax on indemnification payments. It provides a benefit to one party without harming the other, and either party could be in the beneficial position at some point, so neither side will object to its inclusion and it likely won’t even be explicitly discussed.

Buyer Preference: None.

Seller Preference: None.

Differences in a Stock Sale Transaction Structure: None.