Tax Due Diligence in Germany
Successful M&A transactions require a reliable tax due diligence
Frequently, German companies become targets of mergers and acquisitions, shortly known as M&A. However, considering the fact that Germany is not quite a tax haven, purchasers of German target companies should always closely examine the target company on tax risks and therefore take the professional support of an expert tax lawyer into strong consideration.
Even though decisions about M&A transactions are mostly determined on strategic goals, the taxation risks of the target are also of immense significance for the buyer. It is crucial that the purchaser knows about all those tax risks the target faces before he makes a final decision on the transaction. Only after consideration of all taxation and appropriate tax structure issues, an M&A transaction can lead to a successful investment.
Evaluating tax risks and developing tax optimization strategies for the buyer
Whereas the legal due diligence takes all relevant legal risks into account, tax due diligence means that all tax risks and chances of the target company and the buyer are revealed and will be analyzed. This includes:
- examining the effects of taxation resulting from economic dispositions made by the target company before the time of the purchase,
- checking the effects of taxation resulting from economic dispositions to be made by the purchaser himself,
- analyzing the target company, its business contracts entered into with third and related parties, its tax returns filed in the past, etc. regarding tax relevant processes which may lead to unfulfilled tax assessments of the German tax authorities,
- examining past tax audits conducted by the tax authorities taking the statutory periods of limitation for the different types of taxes into consideration,
- reviewing the target company for tax relevant processes which will lead to future tax assessment notes,
- reviewing all pending disputes between the target company and the German Revenue Service and/or German tax courts,
- particularly for international investors, checking whether the German target company should be purchased directly or through a holding company leveraging the investment,
- making sure that loss-carryforwards of the target company can be taken over and do not get lost for tax reasons,
- making a prudent decision on whether an asset deal, a share deal or a merger is the suitable option for the buyer´s transaction.
Learn more about German income taxation for individuals and business companies:
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Full Scope or Red Flag Tax Due Diligence?
There is no one-size-fits-all approach for tax due diligences. Whereas big transactions typically require an in-depth analysis of the target´s tax situation, medium-sized M&A deals oftentimes, not only for costs reasons, require a quick and cursorily due diligence approach which identifies the most important tax risks only. The latter one is also known as a red flag tax due diligence which makes good sense especially in the beginning of a transaction at a time when it is still uncertain whether, at the end of the day, the interested buyer will indeed buy the target or whether he decides to stop negotiating with the vendor. Such a cursory red flag tax due diligence usually only identifies the most risky tax issues (dealbreakers) which have a strong impact on the purchase price.
Unlike the red flag approach, a full scope tax due diligence goes much deeper into the details and intends to identify and to comment on all relevant tax risks – big or small. Typically, a full scope tax due diligence ends in a comprehensive full scope tax due diligence report, whereas the results of a red flag tax due diligence are oftentimes written in a more concisely manner. Many clients request their red flag due diligence results even as a Powerpoint file.
In any case, a useful tax due diligence report should not only identify risks but also propose practicable solutions on how to minimize the risks for the buyer and to enable the buyer to conclude the deal regardless the remaining risks identified. For example and depending on the case, it can be reasonable to include specific provisions in the acquisition contract which allocate open tax obligations to the vendor.
Your German Tax Due Diligence Attorneys
WINHELLER is the competent partner for your tax due diligence in advance of an intended M&A transaction in Germany. All of our tax lawyers will be happy to provide you with the necessary information on the target´s tax risks so that you can make a prudent decision on whether to buy or not to buy the target company.
Your contacts who will be happy to accompany you through the entire M&A process and to pursue a professional tax due diligence are Attorney Stefan Winheller (Certified Specialist for Tax Law) who heads our international tax law department and Attorney Johannes Fein (Certified Specialist for Tax Law). Please contact us by e-mail (firstname.lastname@example.org) or by phone (+49 (0)69 76 75 77 80) and we will promptly arrange an appointment for you in order to talk about your due diligence needs in more detail.