Buyers in an M&A transaction oftentimes intend to rely on members of the target company's management to remain post-closing and assist them with running the purchased business. One way to achieve this goal of retention is to hold back a portion of the purchase price otherwise payable to the management shareholders at closing and pay the proceeds over time based on a vesting schedule tied to continued employment with the buyer or its affiliates post-closing. From a tax perspective, holdback arrangements are ideally structured to (i) delay tax recognition until future payment is received based on applicable tax, as opposed to recognizing tax at the closing of a transaction before payment has been made and (ii) permit taxation of the payment at more favorable capital gains rates, rather than compensation income rates. Ultimately, this will involve a very fact-specific analysis and the tax treatment may vary depending on the tax law of the relevant jurisdiction.
Covering a variety of jurisdictions around the globe, the Multijurisdictional Survey of the Tax Treatment of Holdback Arrangements provides a summary of various design considerations and related tax issues that M&A buyers should consider regarding the tax treatment of holdback arrangements in a question and answer format. This summary is only intended to reflect principles of general applicability and is not intended to provide any tax advice. Local tax counsel should be consulted with respect to the tax considerations and consequences of any holdback arrangement.
For more information on holdback and other types of retention arrangements in M&A transactions, including retention pools, performance-based earn-outs and repurchase rights (or cash clawbacks), see the accompanying article entitled "Using Purchase Price as Retention Tool", originally published by Bloomberg Law in October 2020.
We will be happy to provide more details of the rules and practice in any jurisdiction.
NOTE: The content of this guide is current as of October 2020; the high-level guidance in this summary is not intended to be legal advice. We will be keeping this resource up to date so we encourage you to refer to the most recent report available on this page.