Tax due diligence before acquiring a business in Latvia

Companies are becoming increasingly aware of the benefits of merging with other companies in the industry aimed to strengthen their market position.

One of the ways to expand a business is to invest in another company. Typically, this is done by purchasing the shares or assets of another company.

It is important to understand that purchasing another company may have tax and legal consequences, for example, if the seller of the company has not been aware of the correct way of the application of the tax laws which might potentially result in additional taxes and penalties to the prospective buyer.

This is exactly why carrying out a tax and/or legal due diligence is important. During a tax due diligence, a tax expert verifies whether a company correctly applies or understands the existing tax rules. Likewise, the tax expert would estimate potential risks that might be related to misinterpreting the tax laws by the target or its sellers. That way, when making a decision to acquire another company, the investor will:

(i) be informed about the current tax status;
(ii) understand all the risks associated with the relevant taxes; and will
(iii) know what steps would need to be taken in order to reduce or avoid any potential tax risks.

The most common findings in tax due diligence may relate to:

  • Non- business expenses incurred on behalf of the target’s shareholders or employees, which are treated as business expenses
  • Transactions with related parties may not have been carried out on the arm’s-length basis;
  • VAT risks due to incorrect application of special VAT regimes (i.e., VAT reverse charge).

After a tax due diligence the investor may conclude that the tax risks are relatively high. In such a case, the investor may agree with the seller that the latter will eliminate the identified risks. Alternatively, they may agree on selling/ purchasing an individual asset rather than the entire company as originally intended.

VILGERTS’ tax team offers its tax due diligence services before acquiring a business.

by Viktorija Kristholde-Lūse, Tax Expert, Latvia

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