tax due diligence

Case 1: Preparation and effects of tax due diligence

1. facts of the case

Huber AG plans to take over a competitor (Gantenbein GmbH) who, as a consequence of the lack of succession to Huber AG, wants to sell the shares (in private assets). In order to protect itself from tax risks, the Board of Directors of Huber AG decides to commission an external, independent consultant to perform a tax due diligence. The annual profit of Gantenbein according to commercial law amounts to 0.9 million CHF. The Board of Directors proposes a purchase price of approximately CHF 8 million.

The tax due diligence revealed that non-cash benefits in the amount of CHF 1.5 million have been identified. The applicable tax rate is 21%.

Questions

• What basic items should be covered as part of the tax diligence?
• What effect does the finding have on the price negotiation?

Case 2: Müller AG

1. facts of the case

Müller AG, which is 100% privately owned by Urs Müller, sells 100% of its shares to a competitor. The competitor has a strong market position and is willing to take over Müller AG. In order to minimize tax risks, the board of directors of the competitor decides to commission a tax due diligence during the negotiations. This assignment is awarded to Tax Expert AG.

Tax Expert AG conducts a tax due diligence and identifies the following critical transactions:

1. Urs Müller acquired goods worth CHF 40 000 from Müller AG last year. The cost value amounts to CHF 100 000. The sales price to customers is on average 40% above the cost value. The difference to the cost value has been derecognized in profit or loss.
2. Müller AG has dedicated a recurring sponsorship amount of CHF 30,000 to a local football club, as Urs Müller's son plays football in this club.
3. A friend of Urs Müller has purchased a vehicle at 5 000 CHF which was used for business purposes. The TCS value of the vehicle can be set at 7 500 CHF. The book value of the vehicle is zero.
4. Private expenses for a private trip of Urs Müller have been recorded under administrative expenses. These have not been identified by the tax audit. The amount is estimated at CHF 5,000. These have also not been declared accordingly in the tax return.

The tax rate is set at 22% (federal, cantonal and municipal).

Questions

• How are these four businesses to be assessed?
• What effect do you have on the purchase price if it amounts to CHF 1 million?

Case 3: Gebert AG

1. facts of the case

Heinrich AG, which is a leading supplier of kitchen products, wants to take over a competitor, Gebert AG. Gebert AG tried to set up a succession years ago, but was not successful. Therefore, Heinrich AG would like to acquire 100% of Gebert AG. For this purpose a tax due diligence is commissioned. In this Tax Due Diligence the following statement is made:

Two years ago, shares were recognized at the expense of free retained earnings. At that time, the relevant taxes were not accounted for correctly. The share capital was increased by CHF 1 million in the process.

The purchase price for Gebert AG is set at CHF 3.5 million in a fairness opinion.

Question

• What are the tax consequences of the omission? Point out the consequences under tax law!

Case 4: Heinzer AG

1. facts of the case

The Helbling Group is a holding company that holds investments in the sanitary sector. It currently owns 100% of the shares in five companies. It is currently being offered the shares of Heinzer AG. Following initial negotiations, there is considerable interest in acquiring Heinzer AG.

The following information is available from a tax due diligence commissioned to Tax Experts:

"There are considerable losses carried forward, whereby the following annual results have been achieved according to commercial law (current year = n), whereby all years have been assessed with a net profit of CHF 0:

Since n-9 there is a provision for litigation risks in the amount of CHF 90,000, which have not been offset so far. They qualify as hidden reserves and can be offset by the tax office at any time. In our opinion, the lack of justification no longer exists since the year n-5. In all years, no reorganization under commercial law has been necessary. During this period, a stock of hidden reserves of CHF 250,000 existed under commercial law."

Questions

• What is the taxable profit for year n if the provision offset is not taken into account?
• What is the taxable profit for year n if the provision offset is not taken into account?
• What is the danger with loss carryforwards and possible offsets?

Case 5: Old restructuring of Berger Holding

1. facts of the case

Müller AG would like to buy a sub-group (Berger Holding) from a competitor (Hilber AG). Berger Holding (Berger AG) owns two companies, both of which are operational in Switzerland. All companies have their registered office in Switzerland. A tax due diligence has been commissioned for this purpose. The following findings have been made:

"Two years ago, Berger Holding AG completed a comprehensive restructuring. In the process, the main shareholder, Hilber AG, decided on and completed restructuring contributions in the amount of CHF 10 million. The contributions were recorded as legal capital reserves. The existing losses of CHF 8 million were partially offset (only about CHF 3 million of the losses were offset with grants) with these grants. In the process, the issue duty has not been accounted for or evidence of this duty is missing."

Questions

• What are the legal conditions for the emission tax for redevelopment?
• What is the consequence of this finding for tax due diligence?

Case 6: Intra-Group services

1. facts of the case

Tobler AG (a conglomerate with various shareholdings based in Switzerland) would like to acquire 100% of Breu AG from Keller AG. Breu AG has its operational headquarters in Switzerland, Keller is based in Stuttgart. Breu AG is currently a subsidiary of Keller AG. A tax due diligence is commissioned, which brings the following finding to light:

"Breu AG procures intra-group services from Keller AG, as the only subsidiary. In the last year, services within the scope of € 500,000 have been charged. The content includes consulting, controlling and HR services. The internal services have been invoiced without any supporting documents. This transaction has never been questioned by the tax authorities, although Breu AG shows a very low profit (after this transaction) in each case. This management service has been charged in the last five years."

International tax issues are to be ignored in this task.

Questions

• What tax law problems can be identified here?
• What are the implications for tax due diligence?

Case 7: Provisions in tax due diligence

1. facts of the case

Knaus AG is the subject of a tax due diligence. The following provisions were identified in the annual financial statements (OR), which are recorded in the accounting records and documented with evidence:

a) Investment reserve
Amount: CHF 4 million
Purpose: Reserves for future conversion of a warehouse, no more grants since 2001

b) Provision for warranty services
Amount: CHF 0.5 million
Purpose: Maintenance work for customers (empirical values, 1% of annual net sales in each case)

Furthermore, there is a contingent liability in the notes for a possible lawsuit with a customer. The amount of damages is CHF 1.2 million and the legal probability of a conviction in court is considered probable.

Question

• What conclusions can be drawn from these transactions for tax due diligence?

Case 8: Foreign bond with Group guarantee

1. facts of the case

Target Group is the subject of a tax due diligence. The following information is available from the tax due diligence review, whereby the parent company guarantees the issued bond of the subsidiary:

The bond issued on the capital market bears interest at 5% and the loans within the Group at 4% (assumption: interest rates in line with the market).

Question

• Are there any potential tax consequences from the tax due diligence?

Case 9: Shareholder loan

1. facts of the case

Max Schönenberger wants to sell his company to a holding company. The tax due diligence of the relevant holding company (Max Schönenberger Holding AG) reveals the following:

Max Schönenberger has granted a loan of CHF 8 million to Max Schönenberger Holding AG. A lending bank has also granted CHF 5 million and this bears interest at 4%. Max Schönenberger guarantees this loan privately. The shareholder loan also bears interest at 4%. The only investment held by Max Schönenberger AG is the operating Schönenberger AG with a value of CHF 15 million (excluding hidden reserves). There are no other assets or liabilities

Possible findings from tax audits are to be ignored.

Question

• Are there potential tax consequences from tax due diligence?