In our current environment, there are many Spanish companies affected by the shrinkage of the credit flow, even when they have good quality products and/or services to offer to the market. This creates good opportunities for investors, searching for attractive companies, looking for their chance to grow.
When it comes to invest, it is crucial to plan it properly so as to achieve its full potential, from all possible angles. And, in our experience, one of the key indicators in any M&A transaction is taxation.
The first question is whether you plan to buy stock or the target company’s assets. A stock purchase does not imply any significant change in the Target Company, for tax purposes. It keeps its tax identity and same balance sheet as in a pre-acquisition scenario. However, from the investor’s point of view, it must be noted that it will assume any tax attributes and/or liabilities of target, by means of its participation.
In our experience, it is always advisable to perform a tax due diligence prior to completing the deal, as it helps the understanding of the Target company’s tax situation and the prevention of any uncomfortable tax liabilities inherited from the past, in a post-acquisition scenario.
The Sale and Purchase Agreement (SPA) will be signed with the former owner of target company. Drafting the appropriate indemnity and guarantee clauses in the SPA for any such past liabilities, generally those identified through the tax due diligence process, is of major importance.
In the event an asset purchase is envisaged, the SPA will be drafted between the investor and the Company owning the target assets. This will be the entity assuming any capital gain (or loss, in fewer cases) deriving from the transfer.
The SPA also needs to be drafted accurately since the buyer has joint liability for any past tax contingencies affecting the target assets, in so far as they do not consist of isolated assets but a set of them, allowing the continuity of the economic activity previously developed by the seller. Despite there is a legal possibility to limit this liability by applying for a specific certificate before the Spanish tax authorities relating to the outstanding tax debts of the acquired business, in our experience, this is not always accepted by the seller, as required by Law.
Hence, our advice is that, in this type of transactions, you go through a tax due diligence process as well, in order to determine the guarantee you should be asking from the seller, as it is usually required in a stock deal.
Based on the above, we can conclude that it is of essence to undertake a tax due diligence process in stock deals and, generally, in asset deals as well, in order to mitigate tax risks deriving from the past. But tax due diligence should not be regarded only as a route to face potential problems, but also as an open door through which the tax potential of your investment can be identified responsively.