Tax Indemnity

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Boliden Mineral AB v. FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105

the denial of loss carryforwards of the target was covered by an indemnity clause for reasonably foreseeable loss

Under the share purchase agreement (“SPA”) for the purchase of a Finnish mining company (“Kevitsa”) by one of the respondents (“Boliden”) from one of the appellants (“FQM”), FQM represented inter alia that “[t]here are no grounds for the reassessment of the Taxes of [Kevitsa and its subsidiary].” Pursuant to the SPA’s “general indemnification obligation”, FQM was required to indemnify Boliden for any “Losses” arising from any breach or inaccuracy in its representations. The SPA definition of “Losses” specified that consequential or indirect loss was an indemnifiable loss to “the extent it is a reasonably foreseeable consequence of the event or circumstance constituting the ground for the applicable indemnification obligation”.

Following the acquisition (which closed on June 1, 2016), the Finnish Tax Administration (alleging lack of economic substance) assessed to deny the interest and other deductions arising out of a 2010 reorganization, so that inter alia accumulated tax losses at the time of the acquisition were denied and €14.4 million of tax was assessed on post-acquisition income of Kevitsa, which was no longer sheltered by such losses. An application by Kevitsa to the Supreme Administrative Court of Finland for leave to appeal an adverse decision of the Northern Finnish Administrative Court was still pending.

The Court found that the application judge - who had noted the contrast between the above representation, and other representations and warranties in the SPA which were limited to the knowledge of the sellers – had reasonably concluded that such representation could be untrue as of the time of closing even if the prospect of reassessment was not reasonably expected by FQM. The Court also indicated that there was no error in the judge’s application of the common law concept of reasonable foreseeability to the general indemnification clause, and that the post-closing use by Kevitsa of the accumulated losses (prior to their subsequent denial) was reasonably foreseeable. Accordingly, FQM’s appeal of the finding of liability of it under the general indemnification provision for any taxes payable as a result of the denial of the carryforward losses, was dismissed.