Tax risks and compliance issues in corporate equity M&A

In M&A transactions, especially in equity deals, tax-related issues directly affect the transaction costs for the acquiring party, as well as the taxation risks after the acquiring party takes over the target company. This article will analyze tax compliance issues and recommend how to mitigate taxation risks from the perspective of the acquiring party.

Due diligence

During the process of enterprise equity mergers, the acquirer and the target company will sign a letter of intent or a framework agreement with limited legal effects; the acquirer will then conduct legal and financial due diligence on the target company. Apart from the usual due diligence on the financial statements of the seller, due diligence on the tax compliance of the selling company will also be conducted.

Tax compliance due diligence mainly involves scrutinizing and discovering the types of applicable corporate tax and the corresponding tax rates involved for the target company, and whether there are any taxes owing, tax penalties, pending tax investigations or proceedings, and also whether any tax benefits could be enjoyed. For any tax issues or potential tax risks found in the due diligence process, usually there would be an agreement made in the share transfer document. For example, the acquiring party will require the seller in the terms of the contract to make appropriate tax representations and warranties on tax issues involved in the target company to ensure the evasion of taxation risks of the target company before the closing of the transaction date.