Tax Due Diligence
When your company start to expand, potential investors may wish to invest in your company, they will review previous audit reports and conduct due diligence to understand the potential financial risks of sellers before purchasing your Company.
In general, besides conducting financial due diligence to reduce the risk of hidden debt, professional investors will conduct additional Tax Due Diligence to reduce potential tax risk.
Although Hong Kong's tax system looks simple, there are potential tax risks of being tax investigated by the Inland Revenue Department each year. As Hong Kong's Inland Revenue Ordinance allows the Inland Revenue Department to recover the undercharged tax revenue for the previous 6 years after the end of year of assessment. Therefore, the new buyer may have to bear the tax risks of the seller who may underreport their taxable profits.
Tax Due Diligence enables investors/new buyers to understand whether sellers have the risk of being investigated by the Inland Revenue Department and conduct tax status thoroughly before buying a business. According to the annual report of the Inland Revenue Department, the average annual tax investigation case is has underreported tax revenue of HK $6.5 million, in other words, an average of HK $1 million in taxable income per year.
Tax Due Diligence prior to the transfer of shares enable the buyers to pretend seller transferring tax risk to the new buyer.
Further, when companies operate business outside Hong Kong, there are additional tax liabilities, and tax due diligence enables buyers to understand the tax responsibilities of different regions before purchasing the company, thereby making tax planning and hence reducing the overall tax burden on the company.
As many Hong Kong people sell Hong Kong properties in the form of transfer limited shares to reduce stamp duty on the sale of property. Buyers should, in addition to understanding the potential debt, be more aware of the company's tax risks when purchasing the company. Otherwise, the tax risks may outweigh the stamp duty savings.
In addition, Tax Due Diligence can provide new buyers with an understanding of whether sellers have made the best use of tax planning to further increase tax incentives for buyers to take advantage of post-acquisition advantages.
Finally, a Tax Due Diligence enables you to understand potential risks before share transfer, thereby presenting the right price to the seller and showing the value of the investment.
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