M&A Tax Due Diligence is a critically important procedure during any merger and acquisition transaction, aimed at a detailed examination of the target company's tax liabilities and risks. In Georgia, where tax legislation undergoes frequent changes and enforcement mechanisms are strict, it is vital for an investor to know what hidden liabilities might accompany the acquisition of a company. Tax Due Diligence is not merely a search for past mistakes; it is a strategic tool that allows the buyer to accurately assess the asset's value and demand price adjustments or improved warranty conditions during negotiations. The involvement of a qualified tax lawyer ensures that after the deal closes, the new owner is not burdened with old tax penalties or arrears, which often happens with superficial checks.
The tax audit service during reorganization involves an in-depth analysis of the target company's financial and tax history. The process is complex and covers the following key areas:
- Review of Tax Returns: Verifying the accuracy of Profit Tax, VAT, Income Tax, and Property Tax returns filed over the last 3-5 years (statute of limitations).
- Identification of Tax Risks: Detecting potential violations that could lead to fines or penalties in the future.
- Transfer Pricing Analysis: Determining the compliance of transactions with related parties against market principles (arm's length principle).
- Validation of Tax Incentives: Checking the legality of the company's use of special tax regimes (e.g., Free Industrial Zone, Virtual Zone status).
- Assessment of Disputes: Analyzing existing or expected disputes with the Revenue Service and forecasting their financial impact.
- Payroll Tax Audit: Ensuring the correct administration of personal income tax and pension contributions.
In real-world scenarios, Tax Due Diligence is indispensable. For instance, a foreign investor plans to acquire 100% of a Georgian manufacturing company. Preliminary checks reveal that the company incorrectly classified certain expenses as deductible, leading to a massive shortfall in profit tax payments. In another case, while acquiring an IT company, the buyer discovers that "Virtual Zone" status was applied to services not exempted by law, creating a risk of retrospective penalties. A third scenario involves a merger where it must be determined whether a tax credit transfers to the new entity and if that credit is genuine. A fourth case could be the acquisition of a real estate developer where land valuation and property tax declarations have been incorrect for years.
Georgian legislation clearly regulates the obligations and rights of taxpayers. The Tax Code of Georgia is the primary regulatory act governing the audit process. Particularly important are the articles concerning tax offenses, statutes of limitations (generally 3 years), and succession of liabilities during reorganization. The Law of Georgia on Entrepreneurs defines the corporate aspects of reorganization, while the Tax Code clarifies how tax liability transfers from one entity to another. Regarding transfer pricing, special orders from the Minister of Finance based on OECD guidelines are applicable. Thorough knowledge of these regulations is essential for accurate risk identification.
The Tax Due Diligence process begins with the preparation of an Information Request List sent to the target company. Specialists gather data in a "Data Room" and commence a detailed review of documentation. The next stage involves Q&A sessions with management to clarify uncertainties. An interim report is then prepared, highlighting "Red Flags"—high-risk issues. The final stage produces a comprehensive Tax Due Diligence Report, containing a quantitative assessment of risks and recommendations for deal structuring or Purchase Price Adjustment. This document becomes the primary basis for the buyer's decision-making.
Legal.ge is the ideal platform to connect with experienced M&A tax audit experts in Georgia. The specialists featured on our platform possess deep knowledge of local tax practices and international standards. They will assist you not only in discovering risks but also in structuring the deal to maximally protect your investment. Trust the verified professionals on Legal.ge and make informed investment decisions without any unforeseen tax surprises.
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