It is market practice for a tax covenant, also known as a tax deed, to form part of the transaction documents in respect of a sale of all the shares in a company (the target company) that is:
This Practice Note explains:
A tax covenant is an agreement that is made between the seller and the buyer, and not between the seller and the target company.
A tax covenant is a contractual
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A contractual promise by the seller to pay the buyer an amount equal to any tax liability of the target company or group covered by the tax covenant. It is not a promise to pay the tax but a mechanism for shifting the cost of the tax onto the seller.
Client letter explaining the tax covenant and the tax warranties[Law firm’s letterhead][Addressed to client]Acquisition by [name of buyer] (the Buyer) of [name of target company] (the Company) from [name of seller] (the Seller)—tax [deed of ] covenant and tax warrantiesI [attach OR enclose] for
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