Gross-up: Overview, definition and example
What is a gross-up clause?
A gross-up clause is a part of a contract that guarantees one party gets the full amount they were promised, even if taxes or other deductions apply. If taxes or fees are required by law, the paying party must increase their payment to cover those costs, so the other party still receives the total agreed amount.
Gross-up clauses are often used in contracts involving international payments, executive pay, or loans, where deductions for taxes or fees might otherwise reduce what the receiving party gets.
Why is a gross-up clause important?
A gross-up clause matters because it ensures fairness. It makes sure the receiving party doesn’t lose out due to taxes or deductions, keeping their payment intact. For the paying party, it provides clarity on their responsibilities and avoids disputes over unexpected shortfalls. This clause helps keep payments straightforward and transparent for both sides.
Understanding a gross-up clause through an example
Imagine a company in the U.S. hires a contractor in another country and agrees to pay them $5,000 for their services. Local tax laws require 10% of the payment to be withheld as tax. Without a gross-up clause, the contractor would only receive $4,500 after taxes. However, if the contract includes a gross-up clause, the company must pay an additional amount so the contractor still gets the full $5,000 after taxes are deducted.
Another example could involve a business loan agreement. If the borrower is required to make interest payments, a gross-up clause ensures that any taxes imposed on those payments don’t reduce the lender’s expected income.
An example of a gross-up clause
Here’s how a gross-up clause might look in a contract:
“If any taxes, withholdings, or deductions are required by law on payments made under this Agreement, the paying party shall increase the payment amount so that the receiving party receives the full amount specified, net of any such taxes, withholdings, or deductions.”
Conclusion
A gross-up clause ensures that the agreed-upon payment amount isn’t reduced by taxes or fees, protecting the receiving party’s expectations and providing clarity for the paying party. It’s particularly useful in contracts involving international transactions or situations where taxes might otherwise complicate the payment process.
Including a gross-up clause in your contracts helps avoid disputes and ensures fairness, making it an essential tool for agreements where deductions could impact payment amounts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.