Duff and Phelps Tax Receivable Agreement

Duff and Phelps Tax Receivable Agreement: An Overview

The Duff and Phelps tax receivable agreement is a contractual arrangement between a company and its shareholders to facilitate tax planning and minimize tax liabilities. This type of agreement is particularly useful in the case of initial public offerings (IPOs) or mergers and acquisitions (M&A) where the company`s value increases and triggers a taxable event.

The purpose of a tax receivable agreement is to capture the future tax savings generated by a step-up in the company`s tax basis. In other words, when a company`s value increases, the tax basis of its assets and liabilities also increases, resulting in lower taxes in the future. By entering into a tax receivable agreement, the shareholders can monetize these future tax savings and receive a cash payment upfront.

How Does a Duff and Phelps Tax Receivable Agreement Work?

A Duff and Phelps tax receivable agreement typically includes the following terms:

– The company agrees to pay the shareholders a percentage of the future tax savings generated by the step-up in tax basis.

– The percentage is usually based on the difference between the company`s tax basis pre-transaction and its tax basis post-transaction.

– The payment is made over a period of several years, typically 10-15 years.

– The payment is subject to certain conditions, such as the company maintaining its tax status and the shareholders holding their shares for a specified period.

The Duff and Phelps tax receivable agreement is named after the financial advisory firm Duff and Phelps, which pioneered this type of agreement in the early 2000s. Since then, it has become a popular tax planning tool for companies going public or undergoing M&A.

Why Use a Duff and Phelps Tax Receivable Agreement?

The main advantage of a tax receivable agreement is that it allows shareholders to monetize the future tax savings generated by the step-up in tax basis. This can be particularly useful for early investors who have held their shares for a long time and have a low tax basis. By entering into a tax receivable agreement, they can receive a cash payment upfront and avoid paying higher taxes in the future.

Another advantage of a tax receivable agreement is that it can reduce the company`s tax liabilities. By capturing the future tax savings, the company can offset some of its tax liabilities and improve its cash flow.

Conclusion

The Duff and Phelps tax receivable agreement is a useful tax planning tool for companies going public or undergoing M&A. By capturing the future tax savings generated by a step-up in tax basis, shareholders can monetize their investment and receive a cash payment upfront. At the same time, the company can reduce its tax liabilities and improve its cash flow. If you are considering an IPO or M&A, it is worth exploring the benefits of a tax receivable agreement with your tax advisor.