Tax Due Diligence

Tax due diligence is the workstream of an acquisition audit that analyses the tax compliance and tax exposures of a target company, conducted alongside financial due diligence. Its objective is to identify contingent tax liabilities that could materially impact the acquisition price or require specific protections in the SPA. The scope covers all tax years still open to reassessment and typically includes: corporate income tax (returns, assessments, loss carry-forwards), VAT, transfer pricing (critical for Franco-Swiss groups with intra-group flows), payroll taxes and social security contributions, deferred tax positions, and specific Swiss items: withholding tax, thin capitalisation, capital gain treatment and cantonal tax rulings in force.

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Typical red flags include undocumented intra-group management fees, shareholder current accounts at non-arm's-length rates (a hidden profit distribution risk in Switzerland), VAT errors on cross-border services, contractors reclassifiable as employees generating payroll tax exposure, and permanent establishment risk when a Swiss entity is effectively managed from France, or vice versa.

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The output is a tax risk report grading each finding: confirmed liabilities (already assessed by authorities), probable risks (positions likely to be challenged), possible risks (remote but material) and tax opportunities (unused losses, refundable positions). These findings feed directly into the SPA: general tax representations and warranties cover unknown risks, while identified exposures are addressed through a specific tax indemnity, often franc-for-franc without deductible or basket.

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Example: tax due diligence on a Franco-Swiss group identifies a transfer pricing risk of CHF 800,000 (intra-group service fees without appropriate documentation) and an unrecognised deferred tax liability of CHF 220,000. The acquirer requests a price reduction of CHF 600,000 and a specific tax indemnity covering the transfer pricing exposure for 6 years post-closing.

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At Hectelion, we coordinate tax due diligence with our financial due diligence mandates, ensuring full consistency between financial and tax risk assessments for Franco-Swiss transactions.