Tax Due Diligence

Tax due diligence reviews whether the target has filed and paid its taxes correctly and where additional liabilities may arise. It focuses on open tax audits, dealings with shareholders, transfer pricing, VAT and payroll taxes. Tax dependencies within a group also matter. Common mid-market issues include agreements with shareholders that are not on market terms, private expenses charged to the company and pension commitments to owner-managers.

The review draws on tax returns, assessments, audit reports and records of material transactions. Its scope reflects the business model, transaction structure and tax periods that remain open. For international businesses, intra-group services and cross-border arrangements receive greater attention. In labour-intensive companies, remuneration arrangements and the classification of self-employed workers may be significant.

In a share deal, the tax history remains within the acquired entity and can therefore create an economic burden for the buyer. Specific tax indemnities in the purchase agreement often allocate these risks between the parties. In an asset deal, previous tax obligations generally remain with the seller, although certain liabilities can also affect the acquirer. Choosing an asset deal consequently does not replace a tax review.

Beyond historical exposures, tax due diligence examines how the acquisition affects future taxation. Relevant matters include the availability of loss carryforwards, the tax treatment of financing and possible real estate transfer tax where property is involved. Existing losses are not automatically an asset that can be used in full. Their survival and practical availability require separate assessment.

The findings should support specific decisions. An issue may call for a price adjustment, indemnity, retention or structural change. Its potential amount, likelihood and timing should be considered separately. Arrangements are also needed for managing open audits after completion, accessing records and coordinating contact with tax authorities. The review therefore connects the economic assessment with contractual protection.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.