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12 May 2026

Breaches of Tax Warranties in Post-M&A Disputes Over Share Purchase Agreements: Key Issues and Practical Recommendations for Russian Buyers

19 min.

Authors of the article

Anton.Maltsev@mv.legal

Sergey.Krokhalev@mv.legal

In recent years, pressure from tax authorities on businesses has grown considerably. Authorities are increasingly conducting in-depth pre-audit analyses and on-site inspections, imposing substantial additional taxes, fines, and penalties in an effort to offset rising budget expenditures amid sanctions and declining traditional revenues.¹

One of the priority areas of such scrutiny has been the economic activities and tax compliance of companies that were owned by foreign owners until 2022−2023 and subsequently came under the control of Russian buyers. Tax authorities are scrutinizing the periods of ownership by former foreign owners with particular care, identifying various tax violations, especially in 2022 and 2023, when Russian companies faced numerous financial and currency difficulties and sanctions pressure, forcing them to seek alternative payment methods and engage in transactions atypical for them. As a result, Russian owners are increasingly facing unexpected and substantial additional tax assessments for the period under the previous business owner’s responsibility. Some prefer to challenge the tax authorities' actions in court, while others, holding the former foreign owners specifically responsible for past violations, are filing claims against the sellers of the business.

This is precisely where tax indemnity provisions become critical, as they may be included in the share purchase agreement (SPA) for such transactions. Since 2022, such transactions have frequently been governed by Hong Kong law or English law, with disputes resolved under the rules of the Hong Kong International Arbitration Centre (HKIAC). In this article, we provide an overview of five most pressing issues that arise in such disputes.

Contents of the article

1. Notice of Potential Tax Claims

2. The procedure for resolving third-party claims in a tax context

3. Limitation of the Seller’s Liability Under Tax Warranties

4. Disclosure of Information and Objections Regarding the Buyer’s Knowledge

5. Enforcement of Arbitration Awards Against a Foreign Seller’s Assets

Conclusions and Practical Recommendations

Sources

1. Notice of Potential Tax Claims

In M&A transactions where Russian buyers acquire assets from foreign owners, tax authorities often conduct audits of the asset (the target company) for periods prior to the closing of the transaction. Such audits frequently result in significant additional tax assessments, fines, and penalties. Recently, tax authorities have been paying particular attention to payments for intra-group services provided to the target company by foreign group companies (e.g., consulting services, accounting services, legal support, IT support, and so on). Tax authorities often consider such services a form of income withdrawal from Russia and reclassify them as hidden dividend distributions or payments of other income, thereby refusing to recognize the expenses.

Sometimes share purchase agreements for stakes in a target company include representations by the former owner regarding the absence of tax violations in the target company during the periods of ownership preceding the sale. If tax violations are discovered, the share purchase agreements provide for guarantees to compensate for any taxes assessed. At the same time, the SPA obligates the buyer to notify the seller of a potential warranty claim within a short period-usually 30 to 45 calendar days-after the buyer first becomes aware of the basis for the claim. The notice must generally include the legal and factual grounds, as well as an estimate of the anticipated losses.

The moment when the buyer became aware of the basis for the claim can often be interpreted in different ways. Even if the notice period appears to have been formally missed, courts in Russia sometimes show flexibility if the full amount of losses or other details of the situation become clear later. Merely receiving preliminary information about a legal risk does not prove awareness of the grounds for asserting warranty claims. In this case, preliminary management reports indicated potential risks in the performance of the company’s contracts but did not contain specific facts of a warranty breach or the exact amount of damages. The court found such preliminary information to be insufficient, as it was not supported by evidence and did not allow a reasonable buyer to accurately assess the existence and extent of the claim.

Thus, the mere commencement of a tax audit of the target may be insufficient to trigger the buyer’s obligation to notify the seller of a potential tax warranty claim. Nevertheless, to avoid unnecessary disputes, the prudent approach is to notify the seller even of the fact that an audit has begun. Additionally, tax authorities often request information regarding the target’s foreign counterparties or the transactions under review, which can only be provided by the foreign seller.

Example

Hong Kong arbitration practice includes cases (not necessarily related to changes in the dynamics of tax audits of [Russian] companies previously owned by foreign entities after 2022) where the buyer intentionally concealed tax liabilities, which significantly affected the formation of the transaction price. In the Lucky Sun case, the arbitral tribunal in a dispute under the HKIAC Rules focused on the precise wording of the clause regarding tax losses in the sale and purchase agreement, requiring a direct causal link between the buyer’s actions (failure to pay in Hong Kong dollars) and the seller’s tax liabilities. The tribunal rejected the claims for damages, as the tax would have arisen regardless of the method of payment, emphasizing the causal link and the contractual allocation of risks. ²

Hong Kong law distinguishes between actual, fixed tax liabilities and the existence of risks. If a share purchase agreement does not expressly specify the allocation of risks regarding contingent tax liabilities that may arise in the future but have not yet arisen at the time of the dispute, the breach will most likely be considered a breach of only actual liabilities or liabilities that must be disclosed in accordance with the agreement.³

Respondents in cases involving breaches of tax warranties often argue in their defense that the arbitral tribunal lacks jurisdiction to consider issues regarding the exercise of powers by tax authorities, or that the tribunal is not entitled to "collect" unpaid taxes on behalf of a foreign tax authority, thereby misinterpreting the provisions of the tax indemnity agreement. Here, in the case of BEC Ltd. and BECB Ltd. v. the Respondents, the Hong Kong courts confirmed that the tribunal’s determination of contractual rights and obligations under the share purchase agreement, including tax indemnities, does not constitute the application of or evasion from compliance with foreign tax law and does not conflict with the public policy of Hong Kong.⁴

2. The procedure for resolving third-party claims in a tax context

Additional tax assessments issued by tax authorities for periods prior to the closing of the transaction are classified as classic "third-party claims" in cross-border transactions governed by Hong Kong law. ⁵The buyer is obligated to promptly notify the seller, consult on a defense strategy, and, in most cases, allow the seller to take over the conduct of the case at its own expense. Failure to comply with these procedural requirements may relieve the seller of liability under the warranty in whole or in part.

The purpose of these provisions is to give the seller, who controlled the asset during the period when the tax risk arose, a practical opportunity to participate in the defense and thereby minimize the amount of losses for which the seller may ultimately be liable. This allows the seller to leverage their knowledge of the business, documents, and negotiations from that period, which often leads to a more effective defense and a reduction in the total amount of claims.

From this perspective, it is good practice for a prudent buyer to invite the seller to participate in the conduct of the Russian tax case (including by appointing their own lawyers for this purpose) or at least to provide input on strategy. If the seller refuses, the buyer should challenge the tax authorities' actions on their own. At a minimum, this is necessary to demonstrate that exhaustive steps were taken to minimize losses in subsequent proceedings with the seller regarding the warranty.⁶

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3. Limitation of the Seller’s Liability Under Tax Warranties

In M&A transactions governed by Hong Kong law, financial limits on the seller’s liability are often established: a de minimis threshold for individual claims. These thresholds are typically lower for tax warranties, as tax risks are considered more predictable. In addition, SPA often provide for an aggregate claim limit (basket). The aggregate basket threshold (typically 0.5−1%, but sometimes up to 3% of the price) acts as a sort of entry ticket: as long as the total amount of all claims does not exceed this threshold, the seller pays nothing (deductible basket) or, conversely, once the threshold is exceeded, is liable for the full amount from the outset (tipping basket-the more common option in Hong Kong).⁷

Given these limitations, it is essential for the buyer to approach the calculation of the claim amount carefully. Claiming only the principal tax assessed makes it easy to fall short of the basket or de minimis threshold and end up with no recovery at all. However, the claim can potentially include interest, reasonable defense costs, and other related losses. Relevant case law is instructive on this point. In one case, the court held that the seller’s contractual liability cap applies only to direct damages for breach of warranty but does not extend to accrued interest and defense costs. Such additional amounts arise by operation of law rather than under the contract and may therefore be recovered in excess of the established limit.⁸

4. Disclosure of Information and Objections Regarding the Buyer’s Knowledge

Sellers typically seek to exclude liability for matters that were disclosed in good faith to the buyer at the time of the asset’s purchase or were within the scope of the buyer’s actual or constructive knowledge.

However, fair disclosure requires sufficient detail to enable a reasonable buyer to identify the nature and extent of the risk. General, unspecified references to the possibility of various regulatory, judicial, and other legal risks are insufficient to relieve the seller of liability under tax warranties.⁹

Example

Disclosure is considered in good faith if the seller has drawn the buyer’s attention to a specific issue with the asset. In one case, the seller’s general references in the data room to "potential regulatory risks" and "possible inspections by authorities" were not deemed to constitute good-faith disclosure. The court rejected the sellers' defense, found a breach of several warranties, and awarded the buyer damages.¹⁰

Arbitral tribunals adjudicating similar disputes under Hong Kong law generally do not allow sellers to avoid liability by arguing that buyers should have discovered hidden liabilities during due diligence, particularly in cases where warranties are formulated as absolute and do not provide for limitations based on the degree of knowledge.¹¹

In the CW Baice case, the arbitral tribunal ruled that broad compliance and disclosure warranties in transactions governed by Hong Kong law require sellers to disclose all material facts, including any legal or tax risks. Even in the absence of an explicit tax warranty, failure to disclose material tax risks and liabilities may constitute a breach if such facts are material and were not disclosed.¹²

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5. Enforcement of Arbitration Awards Against a Foreign Seller’s Assets

Even after winning an arbitration case in Hong Kong, a Russian buyer faces a major practical problem: how to actually recover funds from a foreign seller. An arbitral award may be recognized and enforced in more than 170 countries worldwide under the 1958 New York Convention; however, current geopolitical conflicts and the application of sanctions complicate this process.

The chances of an arbitral award being recognized and enforced are significantly higher if the Russian buyer (claimant) is not included on the personal sanctions lists of foreign states, primarily the U.S. and the EU. Nevertheless, even if the buyer is on a sanctions list, recognition of the award is not automatically precluded. For instance, in January 2026, a U.S. court recognized three ICAC arbitration awards totaling approximately $ 14 million, rendered in a case in favor of a Russian state-owned media company. The petitioner in the court was a company from the UAE that had acquired the rights to the claims under the awards through an assignment.¹³

The award may also be enforced in friendly countries. Examples from major countries such as China and India are particularly noteworthy.

There is an agreement in effect between mainland China and Hong Kong regarding mutual assistance in providing interim measures to support arbitration proceedings (Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures). It allows a party to arbitration in Hong Kong, already during the proceedings, to apply directly to the courts of mainland China for the seizure of assets, a prohibition on the disposal of property, or other interim measures-without having to wait for the final arbitration award, provided that the arbitration is administered by an "approved" arbitration institution.¹⁴ According to Chinese sources, awards in favor of Russian individuals are enforced.¹⁵ China has also enacted and implemented a law on countering foreign sanctions.¹⁶

In India, foreign arbitral awards are recognized under the 1958 New York Convention if they are rendered in a jurisdiction recognized by the Government of India as a "reciprocating territory." China, including the special administrative regions of Hong Kong and Macau, is recognized by the Government of India as such a territory. Russian entities have also recently shown great interest in India as a potential jurisdiction for debt recovery from uncooperative parties.¹⁷

Conclusions and Practical Recommendations

The five issues discussed above form the basis of a successful buyer’s position in a dispute. Whether the buyer receives actual compensation or is left empty-handed depends on how precisely the buyer complies with notification deadlines, follows the procedures for conducting a tax dispute, correctly calculates the amount of the claim, and prepares for the enforcement of a future arbitral award.

Procedural compliance is no less important than the merits in determining whether a warranty has been breached. The seller may attempt to avoid liability by citing missed deadlines, the buyer’s general awareness of potential tax risks, the buyer’s failure to follow the proper procedure for resolving claims with tax authorities, or the expiry of the limitation period without any actual tax assessment. In a dispute, the tribunal will scrutinize these formalities closely, and the buyer must be prepared for this in advance.

It is equally important to correctly calculate the amount of the claim. De minimis thresholds and the "basket" may prevent even relatively large sums from being claimed for compensation.

Finally, even after winning arbitration, the money still needs to be collected. The chances of a Russian buyer successfully enforcing an arbitral award are significantly higher if the buyer is not subject to personal sanctions and if the seller has assets in friendly jurisdictions.

To summarize, here are a few practical tips for the buyer:

•

Use tax warranties and indemnities clauses to allocate the risks of disclosed and undisclosed tax liabilities. When calculating damages for a breach, aim to restore the buyer to the position it expected to be in at the time of the transaction.

•

Conduct thorough due diligence and seek the fullest possible disclosure of information. This is key both to preventing disputes and to building a strong position in arbitration: most damages claims arise from tax liabilities that were not identified during the buyer’s review.

•

Consider tax warranty and indemnity insurance as an additional risk coverage tool. This mechanism is increasingly used in the market and can protect the buyer if the seller fails to perform its obligations under the warranties.

•

Notify the seller of the potential for tax claims, even if you are unsure of the timing.

•

Offer to involve the seller in the tax dispute, but simultaneously prepare your own defense.

•

Calculate the claim amount as broadly as possible-include penalties, interest, and all legal fees.

•

Carefully analyze the documents confirming the seller’s disclosure of the buyer’s tax risks at the time of the asset acquisition.

•

Plan in advance for the enforcement of a potential future arbitration award: identify jurisdictions where the defendant has assets and seek injunctive relief as early as the proceedings stage.

Adhering to these recommendations will help transform tax warranties from a formal contractual provision into an effective tool for recovering losses, even in the most challenging circumstances.

Sources

Data from the Federal Tax Service and analysts at AKG "Capital" for 2025 (the average amount of additional tax assessments increased by 48%) (https://companies.rbc.ru/news/5rGQOu8P8g/donachisleniya-za-odnu-vyiezdnuyu-proverku-fns-uvelichilis-na-48-v-2025-godu/).

Lucky Sun Development Limited and Perfect Vision Management Limited v. Gainsmate International Limited, Full Mart Group Holdings Limited and Pep Fund Asia-Pacific District Management Office Limited, Decision of the Court of First Instance of the High Court of Hong Kong HCCT 12/2007, October 2, 2007.

Xu Hongbiao, Estate of Ke Zhengguang v. Oasis Investment Group Limited, Yu Naifen Stephany, Yu Naiwen, Yu Naiyun, HKIAC Case No. A13028, Final Arbitration Award (Excluding Interest and Arbitration Fees), February 28, 2018.

BEC Ltd. and BECB Ltd. v. Respondents, LCIA Case No. 153 051, Decision of the Court of First Instance of the High Court of Hong Kong [2022] HKCFI 3173, October 17, 2022.

Private M&A Comparative Guide — Hong Kong (Mondaq, 2025) (granting the seller control over third-party claims is standard practice in Hong Kong transactions):
https://www.mondaq.com/hongkong/corporatecommercial-law/1567040/private-ma-comparative-guide.

NT Pharma International Company Limited v Novartis Pharma AG [2023] HKCFI 1623 (https://jusmundi.com/en/document/decision/en-nt-pharma-international-company-limited-v-novartis-pharma-ag-judgment-of-the-court-of-first-instance-of-the-high-court-of-hong-kong-2023-hkcfi-1623-tuesday-20th-june-2023).

https://resourcehub.bakermckenzie.com/en/resources/global-private-ma-guide-limited/asia-pacific/hong-kong/topics/agreeing-the-acquisition-agreement/limitations-on-liability

Equitix EEEF Biomass 2 Ltd v Fox & Ors [2021] EWHC 2781 (TCC) (applicable in Hong Kong as persuasive authority) (https://www.traverssmith.com/knowledge/knowledge-container/equitix-eeef-biomass-2-ltd-v-fox-ors-2021-ewhc-2781-tcc-doffing-the-cap-and-upping-the-ante/).

Eurocopy plc v Teesdale [1992] BCLC 1067.

Learning Curve (NE) Group Ltd v Lewis [2025] EWHC 1889 (Comm).

CW Baice Limited v. (1) The Wisdomobile Group Limited (2) The Wisdomobile Limited (3) Wisdomobile HK Limited (4) Beijing Baice Technology Co., Ltd. (5) Shanghai Zhaolin Technology Co., Ltd. (6) Zhuhai Baice Technology Co., Ltd. (7) Beijing Shangxing Zhijian Network Technology Co., Ltd. (8) Mr. Zhu Yipeng (9) The Roc Fortune Ltd., HKIAC Case No. A20083, Final Award, 28 June 2022

https://mv.legal/articles/priznanie-i-ispolnenie-resheniy-po-sanktsionnym-sporam-v-ssha-velikobritanii-i-es-sravnitelnyy-anali/

https://www.info.gov.hk/gia/general/202 504/02/P2025040200700.htm

https://www.szline.cn/law/2025/0926/1194.html

https://npcobserver.com/wp-content/uploads/2023/09/2021-Anti%E2%80%93Foreign-Sanctions-Law_Gazette.pdf

The press is actively reporting on the hearing in Mumbai of a petition filed by LLC "EXSZ-2" seeking interim relief to enforce the decision of the Arbitration Court of the Republic of India (ACRI) to recover a large sum from the Italian construction company Tecnimont (https://dailypioneer.com/news/bombay-high-court-grants-interim-relief-in-eurochem-enforcement).

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