What is a tax receivable agreement?

A tax receivable agreement is a contractual agreement that can arise in the context of a corporate transaction, such as a merger or acquisition. In such a transaction, the seller typically recognizes a gain or loss for tax purposes that can be carried forward and used to offset future tax liabilities. However, in some cases, the buyer of the business may also be entitled to claim a tax benefit based on these carryforward amounts.

To facilitate the transfer of these tax benefits, the parties may enter into a tax receivable agreement. This agreement typically provides for the payment of a portion of any tax savings realized by the buyer as a result of these carryforward amounts to the seller over a specified period of time. These payments can be in the form of cash or other consideration, such as stock or other assets.

Tax receivable agreements are a complex area of tax law and can have significant financial implications for both buyers and sellers in a corporate transaction. It is recommended that parties seek the advice of tax professionals when entering into such agreements.