A tax receivable agreement, or TRA, is a contractual agreement between a company and its shareholders that allows the company to claim certain tax benefits stemming from past or future losses. These tax benefits are typically related to net operating losses or other tax credits.
In a TRA, the company agrees to pay its shareholders a percentage of the tax savings it realizes from using these benefits. The percentage of the payment is usually based on the shareholder`s ownership in the company at the time the benefits were generated.
The purpose of a TRA is to incentivize shareholders to support business decisions that maximize tax savings for the company. This can include strategies like mergers and acquisitions, divestitures, and other major transactions that trigger significant tax benefits.
While a TRA can be beneficial for both the company and its shareholders, it is important to note that it can also be complex and potentially controversial. For example, some shareholders may argue that the agreement unfairly rewards certain shareholders over others or that it results in excessive executive compensation.
Additionally, a TRA can be difficult to value, which can lead to disputes between the company and its shareholders over the payment amount. To avoid these issues, it is important to work with a qualified tax professional and to carefully negotiate the terms of the agreement.
In conclusion, a tax receivable agreement is a contractual agreement between a company and its shareholders that allows the company to claim certain tax benefits while paying a percentage of those benefits to shareholders. While a TRA can be beneficial, it can also be complex and contentious, requiring careful negotiation and expert tax advice.