Have you acquired a company with tax risks? Address them before it is too late
Have you acquired a company with tax risks? Address them before it is too late
Why tax risks identified during due diligence do not disappear when the acquisition is completed or when they are reflected in the purchase price
What deficiencies in tax documentation, contracts and internal processes need to be remedied after taking over a company
How post-acquisition tax clean-up helps address historical issues and prevent them from recurring under the new owner
Contractual protection can shield the buyer from the financial effects of historical issues. However, it will not fill in missing documentation, correct poorly drafted contracts or change the processes that gave rise to the errors. Unless these causes are addressed, the same risks may persist under the new owner.
Every acquisition raises several important questions:
- What is the company’s true value?
- What liabilities and risks is the buyer taking on?
- And how should these risks be reflected in the purchase price and contractual documentation?
Due diligence helps answer these questions, and tax due diligence is an important part of it. It does not focus solely on whether the company filed its tax returns correctly and on time. It examines potential tax liabilities, VAT arrangements, employment taxes, transfer pricing and group relationships, as well as tax losses, investment incentives and other items that may affect the company’s future value.
The aim is not only to identify risks, but also to identify opportunities, structure the transaction appropriately and provide the buyer with a basis for negotiations.
At BDO, we carry out dozens of tax due diligence reviews every year. This gives us visibility of recurring deficiencies in companies, regardless of their size or sector.
The transaction is complete, but the deficiencies remain
After taking over a company, management and the new owners face a demanding period. They need to integrate the company into the group, establish reporting and decision-making processes, get to know key employees, customers and suppliers, and start delivering the business synergies that motivated the acquisition.Naturally, attention turns primarily to the future. Tax findings from due diligence can therefore easily recede into the background.
However, if the company lacks, for example, documentation needed to substantiate the tax deductibility of costs, if its contracts do not reflect how the business actually operates, or if its internal processes have been causing errors over the long term, these deficiencies will persist after the acquisition. Some may also create new risks in each subsequent tax period.
The longer remediation is delayed, the more complex and costly it usually becomes. Employees may change, documents may be lost and knowledge of why certain transactions or relationships were structured in a particular way may disappear.
A due diligence report is not a remediation plan
The main purpose of tax due diligence is to identify risks, assess their potential financial impact and recommend how they should be reflected in the transaction itself. Remedial measures, however, are usually implemented after the company has been taken over.At BDO, we informally refer to this follow-on service as post-acquisition company clean-up. Its aim is to turn the due diligence findings into a practical plan, set priorities and gradually remedy the identified deficiencies.
This is not just about resolving past issues as a one-off exercise. It is equally important to find out why they arose and adjust the company’s operations so that they do not recur.
What does post-acquisition tax clean-up involve?
Every company and every transaction is different. The scope of work therefore depends on the specific findings, their severity and the likelihood of recurrence.We typically encounter situations where it is necessary to:
- complete documentation needed to substantiate the tax deductibility of costs;
- document the acquisition cost of assets and the correctness of their tax depreciation;
- collect contracts and other supporting documents that the tax authority may request in the future;
- assess whether supplementary tax returns need to be filed and, where necessary, arrange for them to be prepared;
- review VAT arrangements, employment taxes, transfer pricing and relationships between associated companies;
- verify whether tax losses, incentives or other tax attributes can be used in the future;
- amend internal policies, control mechanisms and the responsibilities of individual employees.
It also often becomes clear that certain contracts do not reflect how the relationship works in practice. Common examples include marketing or sponsorship, employee benefits, the use of company cars, or cooperation with external suppliers and self-employed individuals.
In such cases, we help amend the contractual and other documentation so that it reflects the economic reality and is also robust from a tax perspective.
In some cases, the issues are specific and more complex. Where necessary, we also take over communication with the tax office, the Czech Social Security Administration or health insurance companies.
So the past does not hold back the company’s future development
The greatest benefit of post-acquisition clean-up is that, alongside the integration itself, management does not have to deal with dozens of outstanding tax matters. It can focus on the business, its people and achieving the planned synergies, while specialists systematically address historical deficiencies and help ensure that the company is set up properly for the future.The outcome is not merely the resolution of individual deficiencies listed in the due diligence report. It is a company that has its tax history under control, has properly configured processes and is far less exposed to unpleasant surprises. Above all, it is a company ready to grow with confidence.