How to negotiate the tax gross-up clause

Abstract

The purpose of a tax gross-up clause is to shift to the borrower the risk that a withholding tax might be imposed on payments due under a loan from a foreign lender. Withholding taxes are often expressed to be the legal responsibility of the recipient of the interest payment, not the payor. The gross-up clause requires that if ever such a withholding tax becomes applicable to payments due under a loan, the borrower will pay that tax on the lender's behalf and will pay an additional amount to the lender, called a gross-up payment, so that the lender will receive the precise amount it would have received in the absence of such a tax. Any deduction as a result of the imposition of withholding taxes thus becomes the borrower's responsibility because the borrower's payment to the lender must be topped up to compensate for the deduction. Guidelines for lenders and boorowers to use in negotiating such gross-up clauses are provided.