Mergers and acquisitions can have many advantages if all goes well. But they can also be harmful and produce integration difficulties, resulting in financial losses and a less productive workforce if the process does not work as planned.
M&As typically involve a substantial amount of due diligence and transaction planning by the buyer and in some cases by the target too. Before committing to the transaction, one should ensure one knows what one is buying. A due diligence aims to reveal the nature and extent of the target company’s contingent liabilities, problematic contracts, uncovered financial positions, historical taxation failures, litigation risks and much more.
Nowadays, the importance of tax due diligence is increasing even more: problems revealed in VAT matters or employment taxation could create incredibly high risks for the buyer, especially if we consider the 50% general tax penalty for unpaid taxes and potentially unlawful deductions. A mistake or non-proper treatment of such general tax types might easily lead to a system error that would be a disappointment, to say the least, if revealed by the tax authority during the first audit after the deal.
Obligations connected with transfer pricing (clearing prices between associated companies) is another related area that carries not only a risk of tax differences, but also very high default penalties for potential non-compliance. The default penalty of HUF 2 million which is due per transaction, per annum is the highest within the region, without even mentioning the potential multiplication of such fines.
The increasing number and volatile nature of Hungarian sectoral industry specific taxes also represents a high risk factor, especially for foreign investors.
When thinking about the taxation issues, one should also concentrate on the future; can the tax advantages or allowances of the target be maintained, or might new ones may be achieved within the post-acquisition structure. It is also necessary to ensure such tax positions are safe by regular consultations with, or requests for rulings from, the financial and tax authorities, and ministries.
Successful mergers, de-mergers, spin offs and other corporate transformations are made by good timing and thorough planning. However, in Hungary a domestic merger takes about nine months, while a cross-border matter could last 11 months, and involve two financial closings. The owners may combine the financial closing necessary for the merger with the statutory financial closing of the participating entities, thus eliminating one extra closing and reducing the transition costs. You can shed an extra closing either at the beginning of the transaction and finalize the merger around September/October, or at the end of the transaction by starting it with an extra financial closing in March/April and then finalize the merger in December.
Such corporate transformations also require the joint work of lawyers, auditors and tax advisors, which have the potential to prove a disaster without effective coordination. Just a few days’ delay in the registration of the merger, for example, from December 31 to January 3 the next year, results in the obligation to handle the three days in between as an additional financial and tax year. That results in an extra financial year-end closing, B/S and P/L preparation, audit and tax return filing obligations.
Planning these activities carefully and properly anticipating the related issues that could arise may determine the success or otherwise of the M&A deal.
LeitnerLeitner undertake to coordinate the entire M&A procedure, to carry out the financial and tax due diligence, to cooperate with lawyers, to help in contract negotiations, lead the transaction structuring and post-acquisition planning. We are also support our clients in leading the mergers, organizing the participants, ensuring tax positions by rulings and negotiation with financial authorities, and we also participate in the deal as a merger auditor.