Tax due diligence for real estate transactions

Due diligence for real estate transactions is generally not limited solely to the condition of land and buildings; it also includes the legal and financial situation and, not least, taxation issues. These taxation issues are of great importance in view of their financial impact on the parties involved and as they can be optimised by early planning.

Tax due diligence and clauses

The purpose of tax due diligence is to obtain comprehensive knowledge about the tax risks that may have been assumed as a result of the transaction and about the tax risks caused by the transaction itself, prior to signing a contract. The determined tax risks have to be quantified and may either be used to claim purchase price reductions in the contract negotiations or may be covered by the provision of certain guarantees in a "tax clause". This is of greater importance for a share deal than for an asset deal.

Based on the tax risks identified in the course of tax due diligence, it is advisable to include a tax clause in the purchase agreement, tailored to the specific situation in order to accommodate the interests of the parties involved.

From the purchaser’s perspective, the tax clause aims at ensuring that potential tax burdens arising from the period prior to the transfer of ownership that only become obvious after the transfer of ownership (for instance, due to the findings of a tax audit) remain with the seller. Typically, the purchasers are not willing to assume tax burdens that have not been triggered by their actions and result from periods prior to the acquisition, and thus are beyond their scope of influence.

As such, the seller normally assures by way of the tax clause that, for the period prior to the transfer date, all tax returns and reports were filed with the competent tax authority in due time, completely and in accordance with the rules within the statutory period or within the deadlines set by the tax authority, and that all taxes and dues have been paid in time and completely. Furthermore, the seller undertakes to indemnify the purchaser or the target company from any additional taxes that may be subsequently assessed for the period prior to the transfer date.

However, a tax clause can only cover one aspect of tax due diligence – the analysis of risks resulting from incorrect tax returns filed in the past. One of the main objectives of tax due diligence is, however, also to analyse the tax consequences when complying with tax law and to find an optimal acquisition structure. These tasks may be of crucial importance for the acquirer and serve firstly to identify future tax burdens, and secondly to optimise these as far as possible. In this respect there is no possibility of recourse to the seller on the basis of the tax clause, as the tax burden is triggered only by or after the transfer of ownership.


Tax due diligence has to be conducted in the process of acquiring real property and its results are taken into account in the course of contract negotiations. In many cases the tax risks cannot be quantified with final certainty and in mutual agreement. This rules out a corresponding purchase price reduction. As such, it is useful to include a tax clause in the purchase agreement tailored to the specific situation, covering these risks and protecting the acquirer. In order to avoid disputes and misunderstandings, the tax clause must be adjusted to the specific requirements of each individual case.

The findings of tax due diligence relating to the future are particularly important for the purchaser. On the basis of these findings, the purchaser can actively influence the future tax burden of the target company and its shareholders. In any event, this opportunity should not be ignored.

In order to find an appropriate tax structure, competent and comprehensive advice should be obtained, tailor-made for the individual case, taking into account the company’s strategic objectives and the situation of the acquirer.

Your contact partners

Heidemarie Wagner

Lawyer, German Public Auditor, Tax Consultant

Phone: +49 30 89 04 82-258




Anke Bendschneider

Tax Consultant

Phone: +49 30 89 04 82-161