Capital gains tax: impact on share purchase agreement

Professional advisers need not be concerned: their usual wording remains valid and requires no major changes. Entrepreneurs who still have an old template gathering dust in a drawer, or who rely on AI, would nevertheless do well to pay extra attention. The limited impact of the new rules depends on a number of basic principles being properly incorporated, which was already the case in a typical, modern and professionally drafted share purchase agreement before the introduction of capital gains tax.

Specifically for the SPA

Tax is the seller’s responsibility

A first important principle concerns who is responsible for complying with the capital gains tax rules. In principle, this is the seller. The buyer or the target (the company being sold) are not liable for this tax.

However, two points require attention.

• Obviously: tax indemnities can be given in both directions and deserve particular attention. In principle, the parties will want to avoid a general tax indemnity given by the buyer also covering the seller’s personal capital gains tax liability. Broad wording could nevertheless have that effect. Clauses that ultimately shift this responsibility to the buyer are, however, relatively uncommon.

• Less obvious, but nevertheless important from a relationship perspective: although the buyer does not need to be directly concerned about the seller’s capital gains tax, a satisfied seller is often also in the buyer’s interest. Continued cooperation after the transaction is not unusual, nor is the desire to be able to turn to the seller occasionally with questions after closing (the final signing and transfer). It may therefore be worthwhile for the buyer to ensure that the seller receives proper advice and avoids unpleasant surprises at a later stage.

The earn-out: clarity, reflecting reality and a positive effect of spreading the payment

The sale price often consists of a fixed amount on the one hand and an earn-out on the other. The latter is a portion of the purchase price that is received in the future and is additionally dependent on certain objectives or KPIs.

First and foremost, it is important to clearly define when such an earn-out becomes definitively vested. The seller will only be taxed on it from that point onwards. It should also go without saying that the components of the purchase price, the amount allocated to each component and the conditions under which payment is due should be clearly specified.

The legal qualification should also correspond to reality. Simply giving something a particular label is not sufficient if that label does not reflect the economic reality, and the tax authorities may look through it. Once again, the sound principle is to prioritise clarity. Where there is continued cooperation after closing, a separate services agreement or management agreement is advisable. The different tax treatment requires the earn-out to be kept strictly separate.

A seller who holds at least 20% of the shares has what is known as a substantial interest and benefits from an exemption on the first EUR 1 million of capital gains every five years. A progressive rate applies above that amount. These principles have of course already been highlighted frequently, but much less attention has been paid to the fact that the progressive rates are applied annually.

Applied to an earn-out, this means that if the earn-out falls into a different tax year from the initial purchase price, the calculation starts again at the bottom of the progressive rate scale. Given that the rate increases from 1.25% to 2.5%, 5% and 10% when capital gains exceed EUR 2.5 million, EUR 5 million and EUR 10 million respectively, spreading the payments over different tax years can therefore also have a positive tax effect for the seller.

Compensation = price adjustment. Possibilities for recovery?

Just as an increase in the sale price after closing is possible, unfortunately so is a potential downward adjustment. Where a buyer brings a claim against a seller after closing based on a representation or warranty, resulting in the seller owing compensation, one clause becomes particularly important in the context of capital gains tax: the sentence stating that such a payment is to be treated as a price adjustment. This is normally already a well-established principle today, but it becomes even more important in this context.

This one short sentence can help the seller approach the tax authorities. If the taxable capital gain ultimately proves to be lower, the seller may seek to recover the capital gains tax that was overpaid. During the first year following the issuance of the tax assessment notice (including the relevant capital gains tax assessment), the seller will generally be in the strongest position to seek such a recovery. During that period, it is possible to file an objection. Once that year has passed, an ex officio relief procedure may potentially still provide a solution, although this is considerably less straightforward. How these principles will work in practice will, of course, also become clearer over the coming years.

The exact closing date may therefore become more important. A transfer on 31 December or 1 January often makes little operational difference, but from a tax perspective it results in a different tax return year. This small difference of a few days could potentially give the seller roughly an additional year to adjust the capital gains tax due. This is not only interesting for transactions where a few clouds are already gathering over the target. It will be interesting to see whether this means that the traditional year-end rush in the M&A landscape shifts by a few days!

Where the seller still needs to discuss certain matters with the tax authorities or other bodies, access to information is obviously important. This was also the case when capital gains tax was introduced, and an information clause is therefore not new. The purpose is for the buyer and the target to guarantee to the seller that documents will be retained. They also undertake to cooperate with the seller should the seller still require information in connection with such a discussion.

It goes without saying that, as a seller, you should avoid having to rely on these provisions as much as possible. This can be done, for example, by retaining the relevant documentation yourself and by discussing a 31 December 2025 valuation of the target with your adviser in good time (the reference date for determining the capital gain). Such a valuation, if one wishes to make use of it, can of course also be arranged independently of an acquisition process, particularly given that the deadline is 31 December 2027.