The Gross-Up Clause: What It Means and How to Negotiate It (2026)

What is a gross-up clause? A gross-up clause requires the paying party to increase a payment so that, after any tax it is required to deduct or withhold, the receiving party still gets the full agreed amount. It is common in loan agreements (where interest is to be paid free of withholding tax), and in cross-border contracts for royalties, fees, interest and services, where the payer's country may require tax to be withheld on a payment to a foreign recipient. Without a gross-up, a withholding tax reduces what the payee actually receives. The payee agreed to receive 100, but after a 10 percent withholding it gets only 90. A gross-up shifts that cost to the payer, so the payee still receives the full 100. This article is general guidance, not legal or tax advice. Tax rates and rules change and are fact specific, so take professional tax advice before relying on a clause. ## Sample gross-up clause ```

GROSS-UP All payments by the Payer under this Agreement shall be made free and clear of, and without any deduction or withholding for, Tax, unless a deduction or withholding is required by law. If a deduction or withholding is required by law, the Payer shall increase the payment so that, after making the deduction or withholding, the Payee receives an amount equal to the amount it would have received had no deduction or withholding been required. The Payer shall pay the full amount deducted or withheld to the relevant tax authority within the time allowed by law, and shall deliver to the Payee evidence of that payment (including any withholding certificate).

- Withholding rate: 10 percent
- Grossed-up amount the payer must pay: 100 divided by (1 minus 0.10), which is about 111.11
- Tax withheld and paid to the authority: 11.11 (10 percent of 111.11)
- Amount the payee actually receives: 100 The key point is that the grossed-up figure becomes the amount paid over, and the withholding is calculated on that larger figure, not on the original 100. ## Where gross-up clauses show up most Gross-up clauses are standard in two settings in particular. The first is lending: in syndicated and bilateral loans, lenders expect to receive interest free of withholding tax, so the borrower grosses up if its jurisdiction requires tax to be withheld on interest paid to a foreign lender. The second is cross-border services, licensing and royalties, where the payer's country taxes payments to non-residents at source. In both, the commercial deal is really the net figure the recipient expects to receive, and the gross-up is the mechanism that protects that figure. The clause is closely tied to the double-tax treaty position, because the rate that has to be grossed up can fall sharply when treaty relief applies, which is why treaty cooperation is worth negotiating carefully. ## How to negotiate a gross-up clause - **Define the scope of Tax carefully.** A gross-up should normally cover withholding taxes on the payment, not the payee's own net income tax. Carve the payee's income tax out, or the payer may end up underwriting the payee's whole tax position.
- **Add a tax credit or refund clawback.** If the payee later obtains a credit or refund for the tax that was withheld, it should account to the payer for it, so the payer is not left out of pocket twice.
- **Cooperate on treaty relief.** The payee should provide the documents that let a lower double-tax-treaty rate apply (for India, a Tax Residency Certificate and Form 10F to claim benefits under section 90), so the gross-up is calculated at the treaty rate rather than the full domestic rate.
- **Allocate compliance.** Say who handles the filings, which in India can include Form 15CA and Form 15CB for foreign remittances. ## Common mistakes to avoid - Grossing up the payee's ordinary income tax rather than only the withholding on the payment.
- No tax credit or refund mechanism, so the payer effectively pays the tax twice.
- Ignoring treaty relief and grossing up at the full domestic rate when a treaty would reduce it.
- Forgetting that the grossed-up amount can itself be taxable, which needs to be checked for the specific payment type. ## A note on jurisdiction Gross-up clauses turn on the tax law of the payer's jurisdiction, so they must be written for it. In India, section 195 of the Income-tax Act, 1961 requires a payer to deduct tax at source on a sum paid to a non-resident that is chargeable to tax in India, with the obligation on the payer. Section 195A deals with income payable "net of tax," which is the statutory home of the gross-up calculation. A lower rate may apply under a double-tax treaty through section 90, where the payee provides a Tax Residency Certificate and Form 10F, and foreign remittances commonly require Form 15CA and Form 15CB. Rates, thresholds and forms change with each Finance Act, so confirm the current position with a tax adviser. Varies by jurisdiction. Last verified October 2026. ## Where a contract workspace helps A gross-up clause only works if it lines up with the tax definitions, the treaty-relief cooperation and the payment mechanics elsewhere in the contract, and if the right certificates are actually collected on time. Across many cross-border contracts that is a lot to keep straight. The idea worth taking away is that drafting, reviewing, tracking and governing the tax terms of a contract can sit in one AI workspace tuned to your company, where the document is read as linked clauses so a gross-up, a tax definition and a payment clause can be checked against each other and the key certificates and dates stay in view. [Adira](https://adiralaw.com) is one tool that keeps a contract's tax terms in a single workspace. The explanation above stands on its own; a workspace simply makes the tax plumbing of a contract easier to keep consistent.