Tax due diligence is where the most expensive surprises tend to hide. Not because the seller necessarily acts in bad faith, but because medium-sized Spanish companies accumulate, over the years, debatable accounting treatments, deductions applied because "that is how it has always been done", and related-party transactions that were never documented because nobody expected them to be reviewed. When the buyer's tax team gains access to the data room, those accumulated positions become quantifiable contingencies that directly affect the price.
In a Spanish mid-market transaction, the tax contingencies identified in due diligence represent on average between 3% and 8% of enterprise value. In transactions where the target has operated in sectors with complex tax treatment — property, financial services, group structures — that percentage can be significantly higher. This guide explains what a tax due diligence team reviews, why they review it, and how findings translate into contractual mechanisms in the SPA (Sale and Purchase Agreement).
The temporal framework: four years under Article 66 LGT
The starting point of any tax due diligence is the statute of limitations. Article 66 of the General Tax Law (LGT — Ley General Tributaria) establishes that the tax authority’s right to assess a tax liability expires after four years, counted from the last day of the voluntary filing period. For a transaction closing in the second quarter of 2026, the unexpired years are 2022, 2023, 2024 and 2025 (assuming the 2025 Corporate Income Tax return has not yet been filed, which is normally the case).
Four years is the standard review period. However, there are situations in which the tax team recommends extending the scope:
Unused tax losses (BINs — Bases Imponibles Negativas). Article 26.5 of the Corporate Tax Law (LIS — Ley del Impuesto sobre Sociedades) establishes that the right to verify unused losses that a company seeks to carry forward expires ten years from the end of the filing period for the year in which those losses were generated. If the target company has losses from periods before the standard four-year window — common in businesses that experienced difficulties during the 2008-2013 crisis — the buyer inherits the risk that those losses may be challenged in a future inspection. Documentation for the years in which those losses were generated remains relevant, even if the ordinary statute has expired.
Ongoing inspections or interruptions of the statute. If the AEAT (Agencia Estatal de Administración Tributaria — the Spanish Tax Authority) has opened a verification or inspection procedure, the statute of limitations is interrupted from the notification of commencement. In those cases, the review period may extend beyond the standard four years, and the buyer needs to understand precisely which years are under examination and where the procedure currently stands.
Restructuring transactions in the past four years. Transactions carried out under the tax neutrality regime in Chapter VII, Title VII of the LIS (mergers, demergers, business contributions, share exchanges) carry a potentially longer review period, because the General Directorate of Taxes (Dirección General de Tributos) may challenge the application of the regime if no valid business purpose existed. If the target has carried out any such transactions in the past four years, documentation of the valid business purpose is critical.
Corporate Income Tax: beyond the filed return
The analysis of Corporate Income Tax (IS — Impuesto sobre Sociedades), primarily through the Modelo 200 annual return, is the central axis of tax due diligence. But the work is not about verifying that returns have been filed — it is about understanding whether the declared taxable result is correct, whether the deductions applied are defensible, and whether the taxable base genuinely reflects the economic reality of the business.
Extra-accounting adjustments
The accounting profit shown in the profit and loss account is not directly the IS taxable base. The company applies positive extra-accounting adjustments (which increase the taxable base relative to accounting profit) and negative ones (which reduce it). The due diligence team analyses each significant adjustment to determine whether it is correctly applied.
The positive adjustments most frequently challenged relate to the deductibility of expenses. Article 15 LIS establishes that certain items are not deductible, including: distributions of equity (disguised dividends characterised as expenses), expenses arising from acts contrary to the legal order, donations and liberalities, and expenses that bear no correlation to the company’s activity. The common practice of running owner-shareholder personal expenses through the business — private life insurance, vehicles used privately but not declared as a benefit in kind, personal travel costs — generates a positive adjustment that the company should have made and frequently has not.
Deductions applied against the tax liability
The LIS provides a catalogue of deductions to incentivise certain activities: R&D and innovation (Article 35 LIS), investment in film productions, job creation, investment in certain territories (the Canary Islands, Ceuta, Melilla). These deductions are legitimate where formal and material requirements are met, but they are a frequent focus of AEAT scrutiny when the amounts are significant.
The due diligence team verifies that applied deductions have sufficient documentary support: technical reports certifying the innovative character of R&D projects, certifications from the CDTI (Centre for Industrial Technological Development) where that route was used, invoices justifying the investments giving rise to the deduction. A deduction applied without adequate documentation is a real — not merely potential — contingency: if the AEAT disallows it, the result is a tax liability with late payment interest at 4.0625% per annum (the current rate in 2026), plus potentially a surcharge or penalty.
Unused tax losses pending carry-forward
Unused tax losses (BINs) are the tax asset most frequently overestimated in M&A transactions. The seller presents them as an asset the buyer can use to reduce future tax charges — and that is true in principle — but there are several limitations the buyer must analyse carefully.
First, the quantitative limitation in Article 26.1 LIS: the use of carried-forward losses is limited to 70% of the taxable base prior to offset (50% for companies with a net turnover exceeding €20 million). Second, the qualitative restriction on a change of control: Article 26.4 LIS provides that carried-forward losses cannot be used if, following a change of control, the acquired company does not carry on an economic activity in the three months after the change, or where the activity is of a notoriously limited scale. Third, documentation: losses generated more than four years ago may be reviewed for up to ten years, meaning that if the records for the years in which they were generated are not available, the losses represent a contingency rather than an asset.
VAT: the deductibility that seems obvious but frequently is not
VAT is the second major source of contingencies in tax due diligence. The logic of the tax appears straightforward — the business deducts input VAT on its purchases and charges output VAT on its sales — but the exceptions to that logic are numerous and frequently overlooked by businesses without a rigorous tax adviser.
Exempt supplies and the pro-rata rule
When a business simultaneously carries on VAT-taxable activities and VAT-exempt activities (residential lettings, financial services, insurance, healthcare or education), it cannot deduct 100% of the input VAT it incurs. It must apply the pro-rata rule (regla de prorrata), which limits deduction to the percentage that taxable supplies represent of total supplies.
In businesses combining taxable and exempt activities — holding companies with subsidiaries making financial transactions, healthcare businesses with both taxable and exempt services — the pro-rata can be a significant source of contingencies if it has been applied incorrectly or not applied at all.
Self-supplies
Article 9 of the VAT Law (LIVA) provides that the transfer of goods from a business’s commercial assets to its owner’s personal assets — or the reverse — constitutes a self-supply subject to VAT. In practice, self-supplies are frequently ignored: when the company makes a company car available to a shareholder for private use without charging output VAT, or when it removes goods from inventory for its own use, it is generating an undeclared self-supply.
Imports and intra-Community transactions
Businesses with international activity face additional obligations: declarations of intra-Community transactions (Modelo 349), correct application of the reverse charge mechanism on certain cross-border service purchases, and VAT management on imports. Errors in these areas are common in businesses that have commenced international activity without adapting their administrative procedures.
Withholdings: the hidden liability in payroll
The income tax (IRPF) withholdings that a business applies to payments made to third parties — employees, directors, professionals, owners of leased premises — are a formal obligation whose non-compliance generates tax consequences for both the payer and the recipient.
Shareholder-director remuneration
The remuneration of shareholders who exercise director functions is the highest-risk area in medium-sized family businesses. The points the due diligence team reviews are:
- If a shareholder-director receives remuneration for their director functions, this must be provided for in the articles of association (Article 217 of the Capital Companies Act — LSC) and approved by the general meeting. If it is not, the tax deductibility of that remuneration is questionable.
- If a shareholder-director receives remuneration for roles other than directorship (managing director, chief financial officer), the existence of a senior management employment relationship or a commercial relationship must be documented by contract.
- The withholding rate applied must be correct for the recipient’s personal circumstances.
Benefits in kind
Life insurance policies in favour of employees, private use of company vehicles, loans at below the statutory interest rate, share options, language school or nursery fees paid by the employer: all of these are benefits in kind that must be valued in accordance with the rules of Article 43 of the Income Tax Law (LIRPF), included in the withholding base and declared. The common practice of not taxing these benefits is a real contingency: if the Labour Inspectorate or AEAT identifies them, the company must remit the unpaid withholdings plus interest and, as the case may be, penalties.
Withholdings on rentals and professional fees
A business that leases premises and pays rent to an individual landlord is required to apply a withholding. The same applies to fees paid to independent professionals who issue invoices with IRPF deductions. Non-compliance is common in businesses without an organised finance function, and is a typical tax due diligence contingency in mid-sized Spanish companies.
Transfer pricing: the most sophisticated and most ignored area
If the target company has economic transactions with related entities — subsidiaries, parent companies, companies owned by the same shareholder, or transactions with the shareholder directly — Article 18 LIS requires that those transactions be carried out at arm’s length and documented in accordance with the obligations of Article 18.3 LIS and Royal Decree 634/2015 (the Corporate Tax Regulations).
Mandatory documentation
The documentation obligation depends on the volume of related-party transactions. For groups with net turnover exceeding €45 million, the Master File and Local File are mandatory. For smaller groups, simplified documentation may be sufficient, but the documentation obligation subsists.
The due diligence team looks first for whether transfer pricing documentation exists. In the majority of medium-sized businesses that have operated within a group structure, the answer is no. That absence does not necessarily mean that related-party transactions have been conducted at incorrect prices — sometimes market prices have been applied intuitively — but it does mean that in an inspection, the burden of proof falls on the company to demonstrate that prices are arm’s length, and that is a weak position.
Most frequent related-party transactions in Spanish mid-market companies
- Property leased to the company by the majority shareholder: If the rent is above or below market value, there is a related-party transaction not at arm’s length.
- Intra-group loans: Without interest or at below-market rates, these generate implicit income for the lender that has not been declared.
- Management fees: The holding company invoices management services to operating subsidiaries. If the services are not real or the price is not justified, these are a tax contingency for both the holding company and the subsidiaries.
- Guarantees: If one group company guarantees another’s obligations without charging a market-rate guarantee fee, there is an undocumented related-party transaction.
The risk of an AEAT adjustment on undocumented related-party transactions is not theoretical. The AEAT has intensified its activities in this area since 2018, and the 2025 Annual Tax Control Plan identifies related-party transactions explicitly as a priority focus.
The statute of limitations and its traps
The four-year period under Article 66 LGT appears clear, but it has significant traps that the due diligence team must know.
Interruptions of the statute
Article 68 LGT lists the events that interrupt the limitation period: any action by the tax authority directed at recognising, regularising, verifying or assessing the tax, notified to the taxpayer. This means that a simple notification of the commencement of a limited verification procedure interrupts the period and restarts it from zero.
The buyer must verify, for each year within the standard limitation period, whether there has been any AEAT action that has interrupted the clock. A limited VAT verification for the 2021 tax year, opened in 2024, means that year remains live in 2026 even though under normal conditions it would already have expired.
The ten-year period for unused tax losses
As noted above, unused tax losses (BINs) have a ten-year review period from the end of the filing period for the year in which they were generated (Article 26.5 LIS). This means that if the target has losses generated in 2016, the buyer inherits the risk of those losses being reviewed until 2027. If the accounting and tax records for 2016 are not available, the BIN is an asset of uncertain value.
The five most common tax contingencies in Spain
Based on our experience in M&A transactions in the Spanish market, these are the five contingencies that appear most frequently in tax due diligence processes:
1. Owner-shareholder personal expenses claimed as business costs. The typical impact in a business with €3 million in turnover can be €30,000 to €80,000 in underpaid Corporate Income Tax plus interest. The contingency is real even where the seller has not acted with intent — it is simply how it has always been done.
2. Related-party transactions without documentation. Particularly property leased to the company by the shareholder, and intra-group loans. An AEAT adjustment affects the taxable base of both parties to the transaction, with a multiplier effect.
3. VAT incorrectly deducted. In mixed-activity businesses where 100% of input VAT has been deducted without applying the correct pro-rata, or in acquisitions that are partially for private use. The impact can be significant in businesses with material capital expenditure.
4. Withholdings not applied on benefits in kind. Life insurance, company vehicles with untaxed private use, share options not correctly valued. The impact includes unpaid withholdings plus interest and, frequently, penalties for failure to remit.
5. Unused tax losses without documentary support. Generated in years that have already expired under the ordinary statute (more than four years), but that remain open to review by the tax authority for ten years. If documentation is not available, the losses may be disallowed in an inspection.
How tax contingencies are reflected in the SPA
Once the tax due diligence report has quantified the identified contingencies, the next step is to translate them into contractual mechanisms in the sale and purchase agreement (SPA).
The three most commonly used mechanisms are:
Direct price adjustment. For contingencies quantified with reasonable certainty whose materialisation is probable. The price is reduced by the amount of the contingency. The seller may resist this option for uncertain contingencies where there is disagreement about the probability of an AEAT assessment.
Specific tax indemnity. The seller undertakes to indemnify the buyer if the company is subject to a tax assessment for pre-closing periods, up to an agreed maximum and for a defined term — typically until the relevant years expire under the statute of limitations, plus a margin. The tax indemnity is the preferred mechanism for real contingencies whose materialisation is uncertain.
Tax escrow. A portion of the price is retained in a guarantee account during the limitation period for the years reviewed, available to compensate any AEAT assessments. The financial cost of the escrow — the money the seller does not receive until the amount is released — is the risk premium that the buyer transfers to the seller.
The negotiation between buyer and seller on the tax due diligence findings is, in essence, a negotiation about the allocation of historical tax risk: who absorbs which probability that the AEAT will assess which contingency, with what maximum exposure and over what period.
For a complete view of the due diligence process from planning to negotiation, see the guide on due diligence process phases. To understand how tax due diligence relates to the other analytical workstreams, see the guide on types of due diligence.
At BMC, the tax compliance and transfer pricing team works in an integrated manner with the M&A advisers to ensure that tax findings are correctly quantified and reflected in contractual conditions that protect the buyer. If you are evaluating an acquisition in Spain, request an initial consultation on the scope and timeline of the tax due diligence.
