Tax Due Diligence: Tax Risks in Company Acquisitions

Definition: What is Tax Due Diligence?

In a tax due diligence, prospective buyers focus on recording the tax situation of the company and identifying tax risks in order to structure an intended corporate transaction in such a way that tax risks are manageable for them. Basically, tax due diligence is a privately conducted tax audit including the trade tax component.

Precisely record the tax risks of the company purchase

Prospective buyers will want to leave tax payment obligations that were triggered before the transfer date with the seller. Initially, the focus is on corporate income tax, trade tax and value-added tax. Recording the interrelationships is not trivial, especially in the case of companies with foreign subsidiaries. In such cases, experts who are well acquainted with the tax law in the countries concerned should also be consulted.

Tax advisors of the prospective buyers will take a look at the tax assessment and, if necessary, check whether there are any tax risks. To do this, they will want to see the current tax assessment notices and reports on recent tax audits. The more recent the official tax audits are, the lower the tax risk for prospective buyers, because audited fiscal years are closed for the financial authorities.

If commercial real estate is to be transferred, the question of a possibly accruing real estate transfer tax is interesting.

In the course of tax due diligence, it is interesting to examine whether any tax loss carryforwards may be lost or taken over as a result of the transaction and whether hidden reserves must be “lifted” and taxed as a result of the transaction.

A tax due diligence checklist can help to systematically record the tax risks.

For structuring advice, buyers and sellers should involve tax advisors with M&A experience.


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