The Earn Out in the Purchase of Shares and its Tax Effects on the Investment Cost

Abstract

The earn out, as a contingent price, has several accounting possible treatments derived from its nature, as well as the facts that underlie its registration. Such amount may (or may not) affect the acquisition value of the investment for accounting purposes, which opens doubts about its tax effects. This article intends to establish which are the possible accounting effects of the earn out, ways to identify its legal nature and its possible effects on the investment value, as well as on the calculation of the Actual Profit Method. At the end of the article, it will be possible to conclude that the tax treatment of the earn out will depend (i) on its legal nature (price, remuneration or premium); and (ii) if there was effective disbursement, without any pending condition.