How far back should tax due diligence look in a cross-border acquisition?

The look-back period should cover at least the full open assessment window in each jurisdiction of the target group. In the EU, this ranges from three years in France under the general droit de reprise (Article L.169 LPF) to up to ten years in Germany where tax evasion is alleged (Section 169 AO). In practice, advisers typically review five to seven years of records to capture risks that could be reopened in extended limitation scenarios, such as fraud or non-filing.

What is the practical impact of ATAD on a target group being acquired?

The Anti-Tax Avoidance Directive (EU) 2016/1164 introduced rules on interest limitation, exit taxation, a general anti-abuse rule and CFC treatment across EU member states, with hybrid mismatch rules extended by Directive (EU) 2017/952. For an acquisition target, the most immediate risks are that intra-group financing structures may breach interest limitation rules, that a post-acquisition reorganisation could trigger exit tax charges, and that hybrid instruments used to reduce the group's effective tax rate may be disallowed. Because member states implemented these rules with permitted national variations, the analysis must be conducted jurisdiction by jurisdiction rather than at the EU level alone.

How are tax due diligence findings typically reflected in the transaction documents?

Identified tax risks are usually addressed through some combination of a price adjustment, a specific indemnity, an escrow arrangement or enhanced representations and warranties in the sale and purchase agreement. Quantified and clearly scoped risks – such as an open transfer pricing dispute – are best handled through a specific indemnity, which provides a more direct recovery mechanism than a general warranty. Risks that are material but difficult to quantify, such as a potential audit in a jurisdiction with an extended limitation period for evasion, may be better managed through deferred consideration or an escrow holdback pending resolution.

Tax Due Diligence in Cross-Border Acquisitions: A Practical Checklist

Tax due diligence in a cross-border acquisition is the structured process of identifying, quantifying and allocating tax risks embedded in a target company before the transaction closes. It spans multiple jurisdictions, overlapping limitation periods and an increasingly complex web of anti-avoidance rules – including the EU Anti-Tax Avoidance Directive (ATAD) framework – making early and methodical preparation essential. The findings directly shape deal price, warranty and indemnity coverage, and post-closing integration planning.

Why Cross-Border Tax Due Diligence Differs from Domestic Review

A purely domestic acquisition allows advisers to apply one set of limitation periods, one transfer pricing regime and one audit culture. Once a second jurisdiction enters the picture, each of those variables multiplies. A target group with operating entities in Portugal, Spain, France, Italy and Germany carries five different assessment windows, five distinct audit risk profiles and potentially divergent approaches to hybrid instruments or intra-group financing.

EU-level legislation adds a further layer of convergence that is frequently misread as uniformity. The Anti-Tax Avoidance Directive (EU) 2016/1164 introduced an interest limitation rule, exit taxation requirements, a general anti-abuse rule (GAAR) and controlled foreign company (CFC) rules across all Member States. Hybrid mismatch rules were extended by Directive (EU) 2017/952. Because each country implemented these measures under its own legislative timetable and with permitted national variations, the rules that apply to a Spanish holding company may operate differently from those governing an equivalent Italian entity, even though both derive from the same directive. Assuming harmonisation without verifying national implementation is one of the most common errors made by buyers unfamiliar with EU tax structuring.

If your transaction involves a German target or holding structure, our dedicated tax structuring practice in Germany can assist with jurisdiction-specific analysis, including the interaction of ATAD implementation with local trade tax rules.

The Core Checklist: What to Examine

1. Open Assessment Periods and Litigation Risk

The first step is mapping every jurisdiction's assessment limitation period against the years for which the target has filed – or failed to file – returns. The following are the verified periods for key EU jurisdictions covered in this guide:

Portugal: The general assessment limitation period (caducidade) is 4 years under Article 45 of the Lei Geral Tributária (LGT).
Spain: The limitation period (prescripción) is 4 years under Article 66 of General Tax Law 58/2003.
France: The general reassessment right (droit de reprise) is 3 years under Article L.169 of the Livre des Procédures Fiscales (LPF), though this extends in specific circumstances such as concealment or fraud.
Italy: Assessment notices must be served by 31 December of the fifth year after the return was filed, or the seventh year where no return was filed, under Article 43 of DPR 600/1973.
Germany: The standard assessment limitation is 4 years, extended to 5 years for gross negligence and 10 years for tax evasion, under Section 169 of the Abgabenordnung (AO).

For each open year, the diligence team should request all filed returns, correspondence with tax authorities, and any notices of audit or reassessment. Where a tax audit is currently underway, the scope and status of that audit should be documented in detail, as it may affect closing conditions or escrow arrangements.

2. Transfer Pricing

Transfer pricing is typically the highest-value risk item in any group acquisition. Reviewers should obtain the target's transfer pricing documentation for each intercompany flow – loans, services, royalties, supply arrangements – and assess whether policies have been applied consistently and whether documentation meets the arm's-length standard in each jurisdiction. Gaps in documentation or outdated benchmarking studies create direct audit exposure.

Particular attention should be paid to cash-pooling structures and intra-group financing, as the interaction between transfer pricing rules and ATAD's interest limitation rule can produce compounded exposure. Where a target has entered into an advance pricing agreement (APA) with one or more tax authorities, the terms and remaining validity of those agreements should be reviewed carefully.

3. Tax Treaty Position

Map every dividend, interest and royalty flow against the applicable tax treaty network. Key questions include: has withholding tax been applied at the correct treaty rate? Have beneficial ownership requirements been met? Has the target's treaty position been affected by principal purpose tests or other anti-treaty-shopping rules introduced following the OECD's Base Erosion and Profit Shifting (BEPS) work? Where treaty relief has been claimed on the basis of a holding structure, assess whether that structure could be challenged under the GAAR introduced by ATAD.

4. Anti-Avoidance Exposure

ATAD's GAAR applies across EU member states, but national courts and tax authorities interpret substantive economic purpose differently. A structure that has operated without challenge for several years may face renewed scrutiny following an ownership change, particularly if the acquisition itself alters the economic rationale of the arrangement. Hybrid mismatch rules under Directive (EU) 2017/952 are especially relevant for groups that have used instruments treated differently by two jurisdictions to produce a deduction/non-inclusion outcome.

CFC rules require review of passive income generated by low-taxed subsidiaries. The diligence team should identify any entities that fall within the CFC definitions as implemented in the relevant home jurisdictions and assess whether the target group has appropriately reported and taxed attributable income.

5. Corporate Tax Compliance History

Beyond the numbers, compliance history matters. Review whether returns have been filed on time in every jurisdiction, whether any voluntary disclosures have been made, and whether there are any pending appeals or settlements with tax authorities. A clean compliance record does not eliminate risk but substantially reduces the probability of a tax audit being triggered by the change of control.

6. Employment Taxes and Payroll

Misclassification of workers, employer social security obligations and the tax treatment of equity incentive plans are frequent sources of hidden liability. These are particularly relevant where the target has international secondees, remote workers or consultants whose status may be characterised differently under local employment law and tax rules.

7. Indirect Taxes

VAT, customs duties and other indirect taxes warrant a separate review, especially for targets that operate across EU and non-EU borders. Check whether the target is properly registered where it has a taxable presence, whether input tax recovery positions are defensible, and whether any customs classifications or valuation methods are subject to challenge.

Our corporate law practice works closely with tax specialists to ensure that the legal and tax dimensions of a transaction are reviewed in an integrated manner, reducing the risk of issues falling between workstreams.

Realistic Timelines

The duration of tax due diligence depends on the size and complexity of the target group, the number of jurisdictions involved, and the quality of the data room. For a mid-size group with entities in two or three EU jurisdictions, a thorough review typically requires between three and six weeks from data room access to a final report. Larger groups with extensive intercompany arrangements, ongoing audits or complex treaty structures may require longer.

It is rarely productive to compress tax due diligence below a reasonable minimum in order to meet an accelerated deal timetable. Material findings that surface post-signing but pre-closing can unravel agreed structures or pricing. Findings that emerge only after closing become the subject of warranty or indemnity claims, which are more costly and disruptive than pre-closing negotiation.

Common Errors by Foreign Buyers

Assuming EU harmonisation means identical rules. ATAD provides a floor, not a ceiling. Member states may apply stricter rules, and the practical application of concepts such as "substantive economic activity" varies across jurisdictions.
Ignoring limitation periods when scoping the review. A four-year window in Portugal or Spain does not mean only four years of risk – fraud or concealment can extend exposure, and the clock may not have started if returns were filed late.
Treating transfer pricing as a documentation exercise. Outdated benchmarking or policies applied inconsistently across the group create substantive risk, not merely a procedural deficiency.
Overlooking post-acquisition tax integration. The structure that is tax-efficient pre-acquisition may become inefficient or non-compliant after the deal, particularly where ATAD's exit taxation rules are engaged by an asset transfer or change of residence.
Failing to engage local counsel. Tax due diligence in multiple jurisdictions requires coordinated input from advisers who understand national implementation nuances, audit culture and the practical approach of local tax authorities.

Tax Risk Allocation: Warranties, Indemnities and Price Adjustments

The findings of tax due diligence feed directly into the tax risk management framework for the transaction. Identified risks may be addressed through a price reduction, a specific indemnity, an escrow arrangement or an enhanced warranty package. The appropriate mechanism depends on the nature of the risk, its probability of crystallisation and the relative negotiating positions of the parties.

A specific tax indemnity is generally preferred over a general warranty for quantified, identified risks, as it avoids disputes over the meaning of "material adverse effect" and provides a cleaner recovery mechanism. For risks that are material but difficult to quantify – such as a pending audit in a jurisdiction with a 10-year evasion window – an escrow or deferred consideration structure may be more appropriate.

For a detailed analysis of how tax findings are translated into contractual protection, our guide on tax warranties and indemnities in M&A transactions sets out the principal drafting considerations and negotiation dynamics.

Decision Checklist: Before You Begin

Have you identified every jurisdiction in which the target group has a taxable presence, registered entity or permanent establishment risk?
Have you mapped open assessment periods for each jurisdiction using the verified windows above?
Is there a current or recently closed tax audit in any jurisdiction?
Does the target rely on treaty relief, ruling comfort or APA protection that could be affected by the acquisition?
Are there hybrid instruments, intra-group loans or CFC structures that require ATAD analysis?
Is the transfer pricing documentation current, complete and consistent with how the policies have actually been applied?
Have employment taxes, payroll compliance and equity plan reporting been reviewed in every relevant jurisdiction?
Has indirect tax compliance been scoped, including VAT registration and customs positions?
Have identified risks been quantified and fed into the deal price and warranty/indemnity negotiations?
Is post-closing integration planning in place to ensure the combined group remains compliant?

If you are at an early stage of structuring a cross-border acquisition and would like to discuss how to scope and manage the tax due diligence process, the team at Ferraz & Whitmore is available to assist. Please write to info@ferrazwhitmore.com or visit our contacts page to arrange an initial conversation.

Sources

International Tax Review – How to manage a tax dispute in Portugal
Studio Legale Mondello – Accertamento fiscale: termini di decadenza e difese
buzer.de – Section 169 AO (Abgabenordnung)

Facts last verified: 22 September 2026.

For a tailored assessment of the tax risks in your specific transaction, please contact us at info@ferrazwhitmore.com or through our contacts page. We coordinate multi-jurisdictional reviews and can assemble the appropriate team for your target's footprint.

Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.

Reviewed by

Sophie Laurent

Legal Analyst · Tax & Data Protection