Tax due diligence is the review of a company’s tax position ahead of a sale, a merger, the entry of an investor or a corporate restructuring. In Andorra, where a growing number of groups and investors are setting up or acquiring companies, this review is key: whoever acquires a company must also take into account the tax contingencies generated before the transaction. That is why it pays to identify the contingencies, quantify them and decide what to do about them before signing.
What is tax due diligence?
Tax due diligence is an analysis of a company’s tax position aimed at assessing the tax risk of a specific transaction. It goes beyond checking whether tax returns have been filed: it reviews the positions taken, the consistency between the accounts and the returns, and the company’s exposure to the Andorran tax authorities.
It should not be confused with two related concepts. It is not a tax inspection by the Departament de Tributs i de Fronteres, which is initiated by the authorities to regularise a taxpayer’s position, nor is it a statutory audit, whose purpose is to give a true and fair view of the financial statements. Tax due diligence is a review commissioned by one of the parties (whoever is going to buy, invest or sell) and designed to support a decision on the transaction with all the information on the table.
Why it is decisive before a transaction
The underlying reason has significant financial consequences: tax contingencies that exist before the transaction can affect the value of the company acquired and, depending on how the deal is structured, give rise to subsequent liabilities or costs. If the company is carrying unpaid taxes, poorly supported deductions, pending regularisations or aggressive tax positions that the authorities could challenge, those bills may surface after completion, when the business is already in the hands of its new owner.
Anticipating that risk completely changes the negotiating position. With a clear map of contingencies, it is possible to adjust the price, require warranties and indemnities from the seller, hold back part of the price through a retention or escrow mechanism, or carve out of the deal whatever proves problematic. Without that analysis, you are signing blind on an essential part of the company’s value.
When should tax due diligence be carried out?
Tax due diligence is advisable whenever there is a change in the ownership or control of a company, or when there is a need to know its tax position with certainty. The most common scenarios are buying or selling a business in Andorra, mergers and demergers, the entry of a new shareholder or an investment fund, the acquisition of a line of business and restructuring corporate transactions.
It also makes sense when it is the seller who commissions it before putting the company on the market (known as vendor due diligence), in order to detect and correct contingencies before the buyer finds them, or as a preventive internal review in groups with a complex structure or several shareholders.
What does tax due diligence review?
The scope is tailored to each transaction, but a full review covers the main Andorran taxes and the company’s relationship with the Departament de Tributs i de Fronteres. The following table summarises the usual areas:
| Area | Focus of the review | Typical risk |
| Impost sobre Societats (IS, corporate income tax) | Tax base, adjustments, tax losses, special regimes and deferred taxes | Tax credits with no real value or poorly supported deductions |
| IGI (indirect tax) | Returns, rates applied, input tax and consistency with the books | Input tax deducted improperly |
| Withholdings, employment obligations and CASS | Withholdings, payroll, payments to professionals and social security contributions | Incorrect withholdings or contributions |
| Related-party transactions | Transfer pricing documentation and arm’s length value | Adjustments due to lack of supporting documentation |
| Local (comú) taxes | Local charges and taxes depending on the parish and activity | Unmet local tax obligations |
| International tax | Tax treaties, economic substance and exchange of information | Undetected liabilities in cross-border transactions |
Impost sobre Societats (IS)
The corporate income tax (Impost sobre Societats) returns filed are reviewed, together with the calculation of the tax base and the adjustments made. Particular attention is paid to the treatment of tax losses carried forward, the application of special regimes or reduced rates, tax credits and deferred tax assets and liabilities, as their treatment can have a significant impact on the company’s tax position and valuation.
IGI (Impost General Indirecte)
IGI is Andorra’s main indirect tax and shares similarities with UK VAT. Its standard rate is currently 4.5%. This part of the review covers the returns filed, the rates applied to each activity, the input and output tax deducted and the consistency between the books and the returns.
Withholdings, employment obligations and CASS
Discrepancies between payroll, contributions and returns tend to translate directly into contingencies.
Related-party transactions and transfer pricing
In groups and companies with intra-group transactions, the transfer pricing documentation is examined, along with whether transactions have been valued at arm’s length. Missing or insufficient supporting documentation can give rise to contingencies and potential adjustments, particularly in structures with a presence in several countries.
Local taxes and other charges
Depending on the parish and the activity, local (comú) charges and taxes are analysed (for example, those linked to property ownership or to carrying on a business) where they may be relevant to the transaction.
International tax and substance
Where the company has an international dimension, the review may include an analysis of the applicable double taxation treaties, economic substance requirements, tax residence and exchange-of-information obligations. This is one of the most sensitive layers for groups operating between Andorra and other countries.
Inspections and open proceedings
Finally, the review checks whether there are any ongoing assessments, information requests, appeals or agreements with the Departament de Tributs. An open proceeding introduces uncertainty about the real tax liability and may affect completion or the drafting of the warranties.
The stages of the process, step by step
Tax due diligence is organised in stages that make it possible to move from raw documentation to a conclusion that is useful for the negotiation:
- Scoping. The taxes, financial years and companies covered by the review are defined, depending on the size of the business and the perceived risk.
- Document request. A list of the documents the seller must provide is drawn up and shared through a virtual data room.
- Review and analysis. The team cross-checks returns, accounts and history, identifies contingencies and estimates their possible financial impact.
- Report. A document is issued that classifies and prioritises the findings according to their nature, likelihood and financial impact, including recommendations on how to manage them.
- Feeding into the negotiation. The conclusions are built into the negotiation of the deal and may translate into price adjustments, retentions, specific indemnities or other contractual protection mechanisms.
The tax review does not happen in isolation. It is usually carried out in parallel with legal due diligence and, where the deal involves property, with real estate due diligence, so that the findings from each area can be cross-referenced and assessed together.
The most common tax red flags
During the analysis, certain warning signs point to a significant tax risk. Recognising them in time makes it possible to gauge their scope before they affect the transaction:
| Red flag | What it usually reveals | Impact on the deal |
| Inconsistencies between the accounts and the tax returns | Errors of judgement or omissions | Doubts about the reliability of the information |
| Unsupported tax losses | Tax credits that may not be usable | Lower tax value of the company |
| Deductions or tax regimes based on questionable or insufficiently supported positions | Possible failure to meet formal or substantive requirements | Regularisations, penalties and interest |
| Undocumented related-party transactions | Transfer pricing risk | Adjustments and greater tax exposure |
| Incorrect withholdings or contributions | Errors in payments to employees or to CASS | Direct contingencies with the authorities |
| Open inspections or proceedings | Risks already identified by the Departament de Tributs | Uncertainty about the real tax liability |
| Pending voluntary disclosures | Known errors that have not been corrected | Latent risk taken on by the buyer |
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The documents requested: the tax data room
The starting point for any review is a good file. The target company is usually required to provide, as a minimum:
- Tax returns for the years under review, especially those still open to assessment: Impost sobre Societats, IGI, withholdings and any other applicable tax obligations.
- Filed annual accounts, accounting ledgers and trial balances.
- Supporting evidence for the deductions, allowances, special regimes and tax losses applied.
- Documentation on related-party transactions and transfer pricing.
- CASS returns and contributions and their reconciliation with payroll.
- Assessments, information requests, appeals and correspondence with the Departament de Tributs i de Fronteres.
- Deeds for previous extraordinary transactions: mergers, demergers, contributions or dividend distributions with tax implications.
The more organised and complete this information is, the faster and more reliable the analysis will be.
Tax due diligence in cross-border transactions
Many transactions in Andorra have an international component: investors coming from the United Kingdom or other countries, groups reorganising their structure or businesses relocating their activity to the Principality. In these cases, the usual tax review is supplemented by the international fit of the transaction: how the double taxation treaties signed by Andorra operate, what effects the tax residence of the parties has, and whether a change of residence could trigger exit taxation (exit tax) in the jurisdiction of origin when assets or shareholdings are transferred.
For those investing from Andorra abroad, a two-fold reading is advisable: on the one hand, the rules of the country where the target company is located and, on the other, Andorra’s own tax framework, starting with Andorran corporate income tax (Impost sobre Societats). This analysis ties in naturally with business valuation and with planning real estate investment abroad, because the tax contingencies identified have a direct influence on the price and structure of the transaction.
Who should carry out tax due diligence and how we approach it at Augé
Tax due diligence combines technical tax knowledge with an understanding of the transaction as a whole. It requires distinguishing what is material from what is incidental and communicating risks in a way the negotiating team can use. This type of review therefore calls for the coordinated involvement of professionals specialising in tax and corporate transactions, together with the corporate law team where the structure of the deal requires it.
At Augé we approach every review from a multidisciplinary perspective, coordinating the tax analysis with the corporate, legal and, where relevant, real estate implications of the transaction. Where there are open tax proceedings or disputes with the authorities, the analysis is complemented by our dispute resolution and litigation team to assess their possible impact on the transaction.
Are you considering buying, selling or bringing a new shareholder into a company in Andorra? Our tax team can review the tax position of the transaction, identify potential contingencies and help you make a better-informed decision. Talk to us or message us on WhatsApp at +376 333 376.
Frequently asked questions
How much does tax due diligence cost?
There is no single fee. The cost depends on the size of the company, the number of years and taxes within the scope and the complexity of the transaction. It is usually quoted once that scope has been defined.
How many tax years does the review cover?
As a general rule, the years that are not yet time-barred are reviewed. In Andorra, the general limitation period for tax matters is three years, subject to the rules on calculation and interruption set out in the legislation. The scope of the review may also be extended where there are items or contingencies originating in earlier years that continue to have tax effects.
How long does it take?
The timeframe depends on the scope of the review, the volume of documentation and the complexity of the transaction. A complete, well-structured data room can speed up the process considerably.
How does it differ from financial due diligence?
Tax due diligence focuses on taxes and tax contingencies; financial due diligence analyses the quality of earnings, debt, working capital and the sustainability of the business. They are complementary reviews that are usually carried out at the same time.
Is tax due diligence mandatory?
As a general rule, it is not a legal requirement. It is a risk analysis and management tool that is particularly relevant when the transaction is of significant size, has a complex structure or there are doubts about the tax position of the target company.
