Tax Due Diligence in M&A: Identify Contingencies Before Closing
Specialist tax due diligence for M&A transactions in Spain: Corporate Income Tax contingencies, VAT, transfer pricing, tax loss carry-forwards, AEAT exposure and SPA contractual mechanisms.
How we work
Scope Definition and Data Room Access
We agree with the buyer's team (or the seller's team in a vendor DD) the scope of the review: tax years to be covered (normally the last four, extended to five in higher-risk transactions), taxes included, depth of analysis and delivery timeline. We request data room access for the necessary documents: Form 200 (IS returns with tax bases), Form 303 (VAT returns), accounting records, transfer pricing documentation, records of prior AEAT inspections, and contracts with shareholders and directors.
IS Analysis: Extracontable Adjustments, Deductions and BINs
We review each IS return to verify the accuracy of extracontable adjustments (non-deductible expenses, impairment reversals, corrections), the eligibility of tax credits claimed in the quota (R&D, job creation, Canary Islands investments) and the documentation supporting them, and the status of tax loss carry-forwards: amounts available, documentation of the years in which they arose, Article 26 LIS annual utilisation limits and AEAT challenge risk.
VAT, Withholding and Transfer Pricing Review
We analyse the application of the partial deduction (pro-rata) rule in mixed operations, the existence of undeclared deemed supplies (autoconsumos), the accuracy of withholding taxes on director remuneration and benefits in kind, and the documentation of related-party transactions. For groups with net turnover above €45M we verify the existence of the Masterfile and Local File required by Article 18.3 LIS.
Red Flag Report and Contingency Quantification
We deliver a tax due diligence report including: description of each identified contingency, legal basis, quantification of impact (tax due plus interest, probability of AEAT challenge), risk classification (high/medium/low) and recommendations for the Share Purchase Agreement (SPA). For each high-risk contingency we recommend the most appropriate contractual mechanism: price adjustment, specific tax indemnity or escrow arrangement.
The challenge
Tax contingencies are the most expensive surprise in a Spanish M&A transaction. Not necessarily because the seller acts in bad faith, but because mid-size Spanish companies accumulate, over the years, debatable accounting treatments, deductions applied without adequate documentation, and intragroup transactions that were never properly priced or documented. When the buyer's tax team accesses the data room, those accumulated issues translate into price adjustments, specific tax indemnities or escrow arrangements that erode transaction value. In mid-market Spanish transactions, identified tax contingencies typically represent 3–8% of enterprise value. Without rigorous tax due diligence before closing, the buyer inherits that risk without having evaluated it.
Our solution
BMC's tax team conducts tax due diligence for M&A transactions in Spain, covering all tax years within the limitation period: Corporate Income Tax (IS), VAT (IVA), employee and director withholding taxes (IRPF), transfer pricing, tax loss carry-forwards (BINs), fiscal consolidation groups and AEAT exposure. We also provide vendor due diligence for sellers who want to identify and resolve contingencies before launching the sale process.
Tax contingencies are the most expensive surprise in a Spanish M&A transaction. In mid-market deals, quantified tax risks typically represent 3–8% of enterprise value — and in companies with undocumented transfer pricing or unsupported tax loss carry-forwards, the number can be substantially higher. BMC’s tax due diligence team provides the rigorous, Spain-specific tax analysis that international and domestic buyers need before committing to a transaction, and the vendor-side analysis that sellers need before opening the data room.
Why tax due diligence is essential in Spanish M&A
Spain’s General Tax Law (LGT) gives the AEAT a four-year limitation period for IS and VAT assessments, extended to ten years for tax loss carry-forwards (BINs). In a share deal, the buyer inherits every open tax year — and the entire AEAT relationship — of the acquired company. An undisclosed IS adjustment of €500,000 from 2023 that the seller is aware of but has not disclosed, a VAT position that has never been reviewed since a change in the company’s activity mix, or transfer pricing on shareholder property leases that was never documented: all of these pass to the buyer on day one of ownership.
The five most frequent tax contingencies in Spanish companies
1. Non-deductible shareholder expenses: the most common contingency in owner-managed companies. Insurance premiums, vehicle costs, travel, property expenses and entertainment that are personal in nature but booked as business costs. AEAT regularly reclassifies these as non-deductible and imposes withholding tax adjustments where they were not treated as remuneration in kind.
2. Transfer pricing without documentation: intragroup transactions — shareholder property leases, intercompany loans, management fee arrangements — that have not been documented at arm’s length values as required by Article 18 LIS. For groups with net turnover above €45M, the Masterfile and Local File are mandatory; for smaller groups, the AEAT can still challenge pricing that deviates materially from market rates.
3. Improperly deducted input VAT: companies with mixed operations (taxable and exempt supplies) that have not correctly applied the pro-rata rule on input VAT. Typically affects financial services companies, insurance intermediaries, real estate businesses and holding companies with dividend income. The adjustment can be material if the company has been claiming 100% deduction when the correct proportion was 60–70%.
4. Unsupported tax loss carry-forwards (BINs): tax losses that have been generated in prior years and are being offset against current taxable income, but for which the documentary evidence — IS returns, accounting records — for the loss years has been lost, destroyed or is incomplete. Article 26.5 LIS gives the AEAT ten years to verify BINs, making this a disproportionate risk in companies with material carry-forwards.
5. Withholding taxes on director remuneration: benefits in kind provided to shareholder-directors (company cars, pension contributions, health insurance) that have not been declared as remuneration subject to IRPF withholding. The combination of a non-deductible expense in IS and a withholding tax adjustment can produce a compounding impact.
SPA contractual mechanisms for tax contingencies
Tax due diligence findings feed directly into the SPA negotiation:
Price adjustment: identified contingencies are deducted from the agreed enterprise value, either euro-for-euro (high-probability, well-quantified risks) or on a risk-weighted basis (probable but uncertain risks).
Specific tax indemnity: the seller indemnifies the buyer for any AEAT assessment on specified contingencies up to an agreed cap, typically with a deductible (de minimis threshold) and a time limit matching the relevant AEAT limitation period.
Escrow: a portion of the purchase price is held in a neutral account for an agreed retention period and released as contingency periods expire. Appropriate where contingencies are uncertain in timing but not in probability.
Representations and warranties insurance (W&I): increasingly used in Spanish M&A, W&I insurance transfers the risk of unknown contingencies from the seller to an insurer after the buyer has carried out adequate tax due diligence. A rigorous tax DD report is a prerequisite for W&I coverage.
The experience behind our work
In the tax due diligence of a mid-market company, BMC's tax team identified material transfer pricing and BIN documentation contingencies. We negotiated a specific tax indemnity with a cap and escrow structure. Without that review we would have acquired the risk without knowing it.
Experienced team with local insight and international reach
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28% reduction in consolidated tax burden and simplification of the corporate structure from 5 to 3 entities.
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Effective tax rate reduced from 47% to 24%, saving €180,000 per year. Article 149 election approved without issues.
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Frequently asked questions on tax due diligence in Spanish M&A transactions
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Tax Due Diligence in Spain: CIT, VAT and AEAT Risk in M&A
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