Tax and Financial Due Diligence in Spain

In Spain, the tax liability of the successor in case of a business acquisition is governed by Article 42 of the General Tax Law (Law 58/2003), which establishes that the acquirer may be jointly liable for the transferor's tax debts. Rigorous tax due diligence is not optional — it is the only way to quantify contingencies before signing. Euroaccounts, from Madrid and with over 500 international companies advised since 1996, performs tax and financial due diligence for M&A transactions in Spain, both buy-side and sell-side, with scope covering the most common contingencies in the Spanish market.

Buy-side and sell-side due diligence for M&A transactions in Spain
Tax contingency analysis: CIT, VAT, withholdings, transfer pricing
Labour contingency analysis: professional classification, ERE, collective agreement
SPA negotiation support: warranties, indemnities and tax escrow clauses
Vendor due diligence for structured sale processes
Coordination with the buyer's/seller's legal and financial advisers

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Due Diligence Services for M&A in Spain

Rigorous analysis that protects your investment and informs price negotiation

Tax Due Diligence (Tax DD)

Exhaustive analysis of tax contingencies: Corporate Income Tax (tax loss carry-forwards, deductions applied, related-party transactions), VAT (pro-rata, self-supply, intra-Community transactions), withholdings (IRPF, NRIT), and Business Activity Tax. Review of non-statute-barred fiscal years (4 years, 10 for undeclared obligations).

Financial Due Diligence (Financial DD)

Quality of earnings review, EBITDA normalisation, net working capital analysis, net debt position, off-balance-sheet contingencies, and financial projections. We identify adjustments that directly impact valuation and the transaction price.

Labour Due Diligence

Analysis of labour contingencies common in Spanish companies: incorrect professional classification, unrecorded overtime, fraudulent temporary contracts, business succession (Article 44 Workers' Statute), equality plan obligations (companies >50 workers), and pending EREs or restructurings.

Vendor Due Diligence and SPA Support

For sale processes, we prepare the vendor due diligence report distributed to potential buyers, identifying and quantifying contingencies proactively. We assist in SPA negotiation with specific recommendations on warranties, indemnities, limitation caps and tax escrow mechanisms.

Tax and Financial Due Diligence Process

A structured 4-phase approach with a 4-8 week timeline depending on scope

1

We agree the scope with the buyer/seller and their legal advisers. We define the fiscal years to review (typically the last 4 non-statute-barred), the analysis areas (tax, financial, labour) and deliverables. We access the data room and request additional documentation.

2

Our team reviews the tax and financial documentation, analyses tax returns, cross-references with the accounts, identifies contingencies and quantifies them. We conduct interviews with the target's finance team to understand accounting policies, tax criteria applied and any ongoing litigation or audits.

3

We prepare the due diligence report identifying and quantifying all detected contingencies, classified by materialisation probability (probable, possible, remote) and economic impact. We include recommendations for SPA negotiation and post-deal integration.

4

We assist the buyer or seller in negotiating the SPA's tax clauses: representations and warranties, specific indemnifications for identified contingencies, liability limits (caps and baskets), tax escrow mechanisms and working capital or net debt price adjustments.

TAX CONTINGENCIES

Principal Tax Contingencies in Spanish Companies — What to Look For

Tax due diligence of a Spanish company must cover a broad spectrum of contingencies that are recurrent in the Spanish market. Euroaccounts’ experience with over 500 companies enables us to identify the most common patterns:

Corporate Income Tax (CIT):

Tax loss carry-forwards (BINs): Verification that pending BINs are real, correctly calculated and not statute-barred.
Tax deductions: Review of R&D deductions (Article 35 LIS), employment creation and others. Common error: applying deductions without required supporting documentation or without a binding reasoned report from the Ministry for R&D.
Related-party transactions (Article 18 LIS): Analysis of whether transfer pricing comply with the arm’s length principle. Common contingency: excessive management fees, royalties without economic substance, intra-group financing at non-market rates.
Non-deductible expenses: Gifts, penalties, director compensation not provided for in articles (the “mileurista” doctrine), expenses without adequate documentary support.

VAT: Pro-rata errors, undeclared self-supply, intra-Community transaction non-compliance.

Withholdings: Payments to non-resident group entities without applying withholding or applying reduced rates without a valid tax residency certificate; benefits in kind not reported.

Each contingency is classified by probability (probable >50%, possible 25-50%, remote <25%) and quantified including principal, late-payment interest and potential penalties (50-150% of the amount depending on infringement gravity).

Review of the 4 non-statute-barred fiscal years (10 if undeclared obligations exist)
Contingency quantification with principal + interest + estimated penalties
Classification by probability: probable, possible and remote
Direct experience with the most common contingency patterns in Spain

LABOUR CONTINGENCIES

Labour Red Flags in Due Diligence of Spanish Companies

Labour contingencies are often the forgotten element in due diligence but can represent significant amounts. Article 44 of the Workers’ Statute establishes that in case of business succession, the new owner is subrogated in all employment rights and obligations, including pension commitments and supplementary social protection obligations.

Common labour contingencies in Spanish companies:

Incorrect professional classification: Workers performing functions above their recognised group. Risk: salary difference claims with 1-year retroactivity and Social Security contribution regularisation with 4-year retroactivity.
Fraudulent temporary contracts: Following the 2022 labour reform (RDL 32/2021), temporary hiring is very restricted. Unjustified temporary contracts are presumed permanent, generating unfair dismissal compensation (33 days/year, max 24 months).
Unrecorded overtime: Since RDL 8/2019, companies must register all employees’ daily working hours. Non-compliance generates penalties of EUR 751-7,500 per worker and potential salary claims.
Equality Plan: Companies with over 50 workers must have a registered Equality Plan (LO 3/2007). Its absence is a serious infringement penalised with EUR 751-7,500.
False self-employed: Economically dependent self-employed workers (TRADE) who are actually employees. Risk: unpaid contributions + surcharges + penalties.

Business succession (Article 44 Workers' Statute): the buyer inherits all employment obligations
Common contingencies: temporary contracts, classification, overtime, equality plan
Direct price impact through adjustments, holdbacks or escrow
The 2022 labour reform has increased temporary contracting contingencies

RED FLAGS CHECKLIST

Red Flags Checklist — What the Buyer Must Verify in a Spanish Target

Based on over 25 years’ experience advising international companies in Spain, Euroaccounts has identified the principal risk indicators every buyer should verify in a Spanish target before closing the acquisition:

Tax red flags: Open inspections or pending assessments; aggressive tax criteria (high deductions, unjustified accelerated depreciation); related-party transactions without documentation; non-inspected non-statute-barred years (paradoxically, never having been inspected can be a risk: contingencies accumulate longer without resolution).

Financial red flags: Significant differences between adjusted EBITDA and accounting EBITDA; seasonal NWC not normalised; off-balance-sheet contingencies (guarantees, ongoing litigation, unrecorded commitments); debtor quality (client concentration, balance ageing, insufficient bad-debt provisions).

Labour red flags: High turnover or absenteeism; recurring employment litigation; key-person dependency without retention clauses; intensive subcontracting (risk of illegal worker assignment under Article 43 Workers’ Statute).

Euroaccounts, as members of INPACT Global, can coordinate the due diligence with correspondents in over 70 countries if the Spanish target has operations or subsidiaries in other jurisdictions.

Tax red flags: inspections, aggressive criteria, undocumented TP
Financial red flags: inflated EBITDA, seasonal NWC, off-balance contingencies
Labour red flags: turnover, litigation, subcontracting, key persons
International coordination via INPACT Global for multi-country targets

Frequently Asked Questions

Common questions about tax and financial due diligence in M&A in Spain

A full-scope due diligence (tax, financial and labour) requires 4 to 8 weeks from data room access to final report delivery. The timeline depends on documentation volume, corporate structure complexity, number of fiscal years to review and the target’s finance team availability. For time-sensitive processes, we offer an accelerated 3-4 week format with a reinforced team.

Typically the last 4 non-statute-barred years (general limitation period per Article 66 LGT). However, if there are undeclared tax obligations, the limitation extends to 10 years (Article 66 bis LGT, for obligations from 01/01/2015 with tax bases exceeding EUR 600,000). If the target has been recently inspected, inspected years have lower risk but not zero (the Tax Authority can review aspects not previously covered).

Article 42 of the LGT establishes the acquirer’s joint liability for the transferor’s tax debts arising from the business activity. This liability is limited to debts accrued prior to the acquisition. It is essential to request from the AEAT a tax compliance certificate and, if possible, a detailed certificate of outstanding debts. SPA indemnification clauses protect the buyer against contingencies that emerge post-closing.

Buy-side DD is commissioned by the buyer to identify risks before bidding or closing. Vendor due diligence (VDD) is commissioned by the seller to anticipate buyer questions and present a transparent picture facilitating negotiation. VDD is common in competitive processes (auctions) where multiple buyers compete and the seller wants to control the narrative. Euroaccounts performs both types.

The most frequent are: (1) undocumented or non-arm’s length transfer pricing in intra-group transactions, (2) R&D deductions without a binding reasoned report, (3) withholdings on non-resident payments not applied or at incorrect rates, (4) incorrectly deducted VAT on mixed or exempt expenses, and (5) non-deductible CIT expenses (gifts, director compensation without articles coverage). These contingencies can represent 5%-15% of the target’s enterprise value.

Contingencies are reflected in several ways: direct price adjustment (for probable and quantifiable contingencies), price retention or escrow (for possible contingencies pending resolution), specific SPA indemnification clauses (for identified but imprecisely quantifiable risks), and limitation caps fixing the seller’s maximum liability. The combination depends on the nature and amount of detected contingencies.

Highly advisable, especially in Spain where labour law is complex and employee-protective. Article 44 of the Workers’ Statute establishes that the buyer is subrogated in all employment rights and obligations, including collective agreements, pension plans and ongoing litigation. The most costly labour contingencies (EREs, professional reclassifications, false self-employed) can represent millions of euros and must be identified before closing.

Yes. As members of INPACT Global, a network with presence in over 70 countries, we coordinate tax and financial due diligence in Spain with correspondents performing the analysis in other jurisdictions. This ensures a homogeneous approach, consistent methodology and a consolidated report enabling the buyer to have a global view of the transaction’s risks, not just the Spanish ones.

Insights

International Specialist Team

Our due diligence team combines M&A transaction experience with deep knowledge of Spanish tax and labour regulation. Professionals with Big Four audit and corporate finance backgrounds, with direct experience in buy-side and sell-side due diligence for international buyers. Trilingual team (Spanish, English, French) led by David Bua from Madrid.

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Considering an Acquisition or Investment in Spain?

Contact our team before committing. Rigorous tax and financial due diligence protects you from hidden contingencies and strengthens your negotiating position. Preliminary scope assessment within 48 hours, at no obligation.

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Trilingual team: ES · EN · FR
+500 companies advised since 1996
Member of INPACT Global — 60+ countries

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91 991 84 80 · info@euroaccounts.eu

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Tax and Financial Due Diligence in Spain

Global leaders already working with us