due-diligence
Tax due diligence reviews the target’s tax filings, exposures, attributes and the tax consequences of the deal structure. It tells the buyer what historical risk it is inheriting and how the purchase itself will be taxed.
Tax due diligence has a backward look and a forward look. The backward look asks whether the company has paid the right tax, used the right incentives, and documented related-party pricing in line with OECD transfer-pricing expectations. The forward look asks how the transaction itself is taxed: share deal versus asset deal, withholding, transfer taxes, the survival of losses, and the buyer’s post-deal group.
Under IAS 12, uncertain tax positions already belong on a complete set of financials. Deal tax work goes further: it asks which of those positions a buyer will underwrite, insure, or leave with the seller through indemnity and escrow.
A share purchase usually preserves tax attributes inside the company and can be cleaner commercially, but the buyer inherits historical tax risk. An asset purchase can deliver a step-up in the tax basis of assets in some jurisdictions and leave historic tax in the selling entity — at the cost of transfer taxes, contract consents and a messier operational day one.
A Portuguese services company reports a clean tax position. Tax DD finds that a 2023 R&D credit was claimed on projects that fail the substantiation file, and that a management fee to a related Luxembourg company has thin documentation. The cash tax exposure is estimated (illustration only) at €0.6m plus interest. The SPA moves from a general warranty to a specific tax indemnity with a 36-month escrow.
Buyers care because tax is a real cash claim with look-back periods measured in years. Sellers care because a poorly prepared tax file invites a price chip that feels “technical” but is entirely financial. Funds care because Invest Europe professional standards expect tax risk to be identified, not hoped away.
Reading the last tax return and stopping. Ignoring payroll and VAT in a “corporate tax only” scope. Assuming losses survive a change of control. Treating transfer pricing as an accounting allocation rather than a documentation and substance test.
Tax DD is not a ruling from the authority. Estimates of exposure are judgements. Some risks are only visible after an audit starts. Cross-border deals add treaty and anti-hybrid analysis that a local file will not contain.
Tax work goes faster when the trial balance, related-party map and deal structure live in one place. That is the same structured layer financial due diligence already needs.