Gross-Up

What Is a Gross-Up?

A gross-up is an additional payment made to a recipient to offset the tax liability arising from the original payment, ensuring the recipient receives the full intended after-tax amount. In M&A, gross-up provisions appear in executive compensation agreements, indemnification clauses, cross-border payment structures, and tax-related purchase price adjustments.

The concept is straightforward: if Party A owes Party B $100 and the payment is subject to 30% withholding tax, Party B would only receive $70. A gross-up provision requires Party A to pay $142.86 instead ($142.86 − 30% tax = $100 net to Party B). The gross-up ensures the economic bargain is preserved regardless of the tax treatment.

Gross-Ups in M&A

Executive Compensation (Section 280G)

The most common M&A gross-up involves Section 280G of the Internal Revenue Code, which imposes a 20% excise tax on “excess parachute payments” — golden parachute payments that exceed three times the executive’s base amount. Under a 280G gross-up, the company agrees to pay the executive an additional amount to cover both the excise tax and the income tax on the gross-up payment itself.

Without Gross-Up	With Gross-Up
Parachute payment: $3,000,000	Parachute payment: $3,000,000
Excise tax (20%): ($600,000)	Gross-up payment: ~$1,200,000
Net to executive: $2,400,000	Total payment: ~$4,200,000
	Net to executive: $3,000,000

The gross-up amount exceeds the excise tax itself because the gross-up payment is also taxable, requiring an iterative calculation.

Declining prevalence: According to Equilar data, 280G gross-ups have declined dramatically among public companies — from over 50% of S&P 500 companies in 2008 to fewer than 5% by 2024. Proxy advisory firms (ISS, Glass Lewis) and institutional investors have pressured companies to eliminate gross-ups as excessive pay practices. Most companies now offer a “better of” approach: the executive receives the lesser of the full parachute payment minus excise tax, or a cutback to the safe harbour threshold (three times base amount minus $1).

Withholding Tax on Cross-Border Payments

In cross-border M&A, payments between entities in different jurisdictions may be subject to withholding taxes. Gross-up provisions ensure that the intended economic outcome is preserved:

• Interest payments — acquisition debt serviced across borders may face withholding tax
• Royalty payments — IP licence fees between group companies
• Dividend distributions — payments from the target to the acquirer’s holding structure
• Consideration payments — purchase price payments subject to source-country withholding

Indemnification Payments

Indemnification clauses in M&A agreements sometimes include a gross-up provision ensuring that indemnity payments compensate the buyer on an after-tax basis. If the indemnity payment is itself taxable income to the recipient, the gross-up covers the tax cost so the buyer is made truly whole.

Calculating a Gross-Up

The general formula for a gross-up where the recipient faces a combined tax rate of t:

Gross-Up Amount = Payment / (1 − t) − Payment

For a $1,000,000 payment subject to a combined 40% tax rate:

Gross-Up = $1,000,000 / (1 − 0.40) − $1,000,000
         = $1,666,667 − $1,000,000
         = $666,667

Total payment = $1,666,667. After 40% tax ($666,667), the recipient nets $1,000,000.

APAC Context

Australia — gross-up provisions are common in Australian M&A for withholding tax on intercompany payments within acquisition structures. Australia’s extensive tax treaty network reduces withholding rates, but gross-up clauses provide a backstop if treaty benefits are unavailable or if the Australian Taxation Office challenges the structure.

India — Indian withholding tax rates on cross-border payments are among the highest in the region (up to 40% on certain payments to non-residents). Gross-up provisions in India-related M&A transactions are critical for preserving the economics of acquisition financing and ongoing intercompany arrangements. The complexity of India’s transfer pricing rules adds another layer to gross-up calculations.

Hong Kong — Hong Kong’s territorial tax system (no withholding tax on dividends or interest) reduces the need for gross-up provisions in many structures. This tax advantage is one reason Hong Kong is a popular holding company jurisdiction for APAC acquisitions.

“Gross-up provisions are the mechanism that ensures tax consequences don’t erode the economic bargain the parties negotiated,” notes Daniel Bae, founder of Amafi. “In APAC cross-border structures, where withholding tax rates vary from zero in Hong Kong to 40% in India, gross-up clauses can represent millions of dollars of annual cost.”

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