The Tax Indemnity Clause: What It Means and How to Negotiate It (2026)

What is a tax indemnity clause? A tax indemnity clause is a promise by one party, usually the seller in a company sale, to reimburse the other for defined tax liabilities. It is most common in share purchase agreements, where it is often called the tax covenant. When a buyer acquires the shares of a company, it inherits the company's history, including its tax exposure. The tax indemnity makes the seller stand behind tax that relates to the period before completion and that was not already paid or provided for. The logic is simple. The buyer priced the deal on the basis of the accounts it was shown. If a tax liability from before completion then crystallises, the buyer does not want to carry a cost that belonged to the seller's period of ownership. The tax indemnity shifts that cost back to the seller. This article is general guidance, not legal or tax advice. Tax is fact specific and rules change, so take professional advice before relying on a clause. ## Sample tax indemnity clause ```

TAX INDEMNITY (TAX COVENANT) The Seller covenants to pay to the Buyer an amount equal to: (a) any Tax liability of the Company arising in respect of, or by reference to, any income, profits or gains earned, or any event or transaction occurring, on or before Completion; and (b) any reasonable costs properly incurred by the Buyer or the Company in connection with such a Tax liability or with this covenant, except to the extent that the Tax liability was paid before Completion or was specifically provided for in the Completion accounts. Standard exclusions, the conduct of tax claims, time limits, and over-provision and refund rules are set out in Schedule [ ].

- **A tax indemnity (covenant)** is a promise to pay a defined amount when a defined trigger occurs, broadly on a one-for-one basis, without the same need to prove loss. Buyers prefer the indemnity for known or quantifiable tax risk because recovery is more certain. ## How to negotiate a tax indemnity clause - **Scope.** The buyer wants the indemnity to cover all pre-completion tax not provided for. The seller wants it limited to the pre-completion period, excluding tax that was provided for, and excluding tax caused by the buyer's own acts after completion.
- **Exclusions and limits.** Expect a de minimis, a cap, and time limits. Time limits for tax usually run longer than for ordinary warranties, to track the tax authority's reassessment window.
- **Conduct of claims.** Decide who controls dealings with the tax authority when a pre-completion tax claim arises, since the party paying wants a say in how it is defended.
- **Over-provision and refunds.** If the target turns out to have over-provided for tax, or receives a refund relating to the pre-completion period, the buyer should account to the seller for the benefit.
- **Treatment of the payment.** Agree whether an indemnity payment is treated as a reduction of the purchase price or as a separate receipt, because that can affect its own tax treatment. ## Common mistakes to avoid - Relying on warranties alone for a known tax exposure, when an indemnity gives more certain recovery.
- A time limit shorter than the tax authority's reassessment window, leaving the buyer exposed.
- No conduct-of-claims mechanism, so the party that has to pay loses control of how the claim is handled.
- No exclusion for tax caused by the buyer's own post-completion actions.
- Forgetting how the indemnity payment itself is treated for tax. ## A note on jurisdiction A tax indemnity has to be written for the tax system that applies to the target. In India, pre-completion exposures can include income tax (with reassessment time limits under the Income-tax Act, 1961 that have been changed by recent Finance Acts), Goods and Services Tax, stamp duty, and withholding tax, and an indemnity is a contractual obligation recognised under sections 124 to 125 of the Indian Contract Act, 1872. The time limits in the indemnity should track the relevant reassessment periods, which differ by tax and have changed over time, so confirm the current windows with a tax adviser. Varies by jurisdiction. Last verified October 2026. ## Where a contract workspace helps A tax indemnity only protects the buyer if its scope, exclusions, time limits and conduct-of-claims mechanics line up with the warranties, the disclosure, and the limitation provisions elsewhere in the agreement. Checking that by hand across a long share purchase agreement and its schedules is slow and easy to get wrong. Reading the agreement as linked clauses, drafting and editing the indemnity, reviewing where it has to agree with the warranties and the limitations, and keeping the key dates and caps in view can all sit in one AI workspace shaped around how your deals run. [Adira](https://adiralaw.com) is one such tool for keeping that consistency. The explanation above stands on its own.