Payment of other taxes by the borrower: Overview, definition, and example
What is payment of other taxes by the borrower?
Payment of other taxes by the borrower refers to a clause in loan agreements or credit facilities that obligates the borrower to cover specific taxes, fees, or charges related to the loan or its transactions. These taxes may include stamp duties, withholding taxes, value-added taxes (VAT), or other levies imposed by governmental authorities. The clause ensures that the lender is not burdened with additional costs arising from the loan arrangement.
For example, a borrower may be required to pay stamp duties on the loan documents as mandated by local regulations.
Why is payment of other taxes by the borrower important?
This clause is important because it allocates the responsibility for tax-related expenses to the borrower, protecting the lender from unexpected liabilities. It ensures that the lender receives the agreed-upon payments without deductions or delays caused by tax obligations.
For borrowers, understanding this clause is critical to budgeting and planning for all costs associated with the loan. For lenders, it guarantees that they are fully compensated and shields them from financial or administrative burdens related to taxes.
Understanding payment of other taxes by the borrower through an example
Imagine a company takes out a loan to fund a construction project. The loan agreement includes a payment of other taxes clause, requiring the borrower to pay any VAT or transaction taxes related to the disbursement of funds. If the local tax authority imposes a 5% tax on the transaction, the borrower must pay it, ensuring that the lender receives the full loan amount without deductions.
In another example, a borrower secures a credit facility with an international bank. The agreement stipulates that if withholding taxes are imposed on interest payments, the borrower must “gross up” the payments, covering the taxes so the lender receives the full interest amount specified in the agreement.
An example of a payment of other taxes by the borrower clause
Here’s how a payment of other taxes by the borrower clause might appear in a loan agreement:
“The Borrower shall pay all present and future taxes, duties, levies, or other charges imposed by any governmental authority in connection with this Agreement or any transactions contemplated herein. In the event any withholding taxes are required by law, the Borrower agrees to gross up the payments so that the Lender receives the full amount due under this Agreement.”
Conclusion
The payment of other taxes by the borrower clause ensures that the lender is protected from financial or administrative burdens related to taxes associated with the loan. For borrowers, this clause highlights the importance of understanding and accounting for additional costs beyond principal and interest payments. Clear and precise drafting of this clause is critical to ensuring transparency, compliance with tax laws, and fairness in loan agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.