Raising investment or preparing for a potential exit is one of the most exciting — and stressful — times for any startup or scaleup. You’ve built a product, attracted customers, and proven your business model. Now, investors or buyers want to take a closer look under the hood.
Welcome to the world of due diligence.
While many founders focus on their pitch deck, financial forecasts, and product roadmap, one crucial area often catches them off guard: tax due diligence.
A messy tax situation can delay deals, reduce valuations, or even derail negotiations entirely. Conversely, clean and well-documented tax records build investor confidence and keep the process smooth.
Whether you’re planning a funding round or contemplating an acquisition, this guide will help you prepare. Here’s a practical tax due diligence checklist for startups and scaleups — so you can avoid surprises and stay in control.
Why Tax Due Diligence Matters
Investors and buyers don’t just want to know how innovative your product is. They also want assurance that your business is legally compliant, financially sound, and free of hidden liabilities.
Tax issues are particularly sensitive because:
- Unpaid or underpaid taxes can result in large, unexpected costs.
- Tax audits or disputes can cause disruption and reputational risk.
- Tax inefficiencies might indicate weak internal processes.
Being proactive about tax due diligence helps you avoid these pitfalls and demonstrates professionalism to your stakeholders.
Your Tax Due Diligence Checklist
Below are key areas you should review before opening your books to external parties. Think of this as your preparation toolkit.
1. Tax Filings and Payment Confirmations
Investors will want proof that you’re compliant with all filing obligations. This means:
- Annual corporate tax returns (e.g. Körperschaftsteuererklärung in Germany)
- VAT returns (monthly or quarterly)
- Payroll tax filings and social security declarations
- Trade tax (Gewerbesteuer) filings if applicable
- Solidarity surcharge (Solidaritätszuschlag) payments
- Any other country-specific filings if you operate internationally
Gather:
- Copies of filed tax returns for the past 3-5 years (or since founding)
- Evidence of tax payments (bank statements, payment confirmations)
Tip: Keep these documents organized by fiscal year in a dedicated folder.
2. Tax Assessments and Correspondence
Tax authorities often issue assessments or letters confirming how much you owe. Keep:
- All tax assessments (Bescheide) for recent years
- Any correspondence with tax offices, especially regarding disputes or audits
- Records of any outstanding tax liabilities
A surprise tax bill discovered during diligence can become a red flag for investors.
3. VAT Compliance
VAT is one of the most common areas where startups make mistakes. Investors will check:
- Whether you’re registered for VAT where required
- Whether VAT rates applied to your products/services are correct
- How you handle reverse charge transactions for cross-border services
- Whether input VAT deductions (Vorsteuer) are documented properly
- Compliance with VAT invoicing requirements
If you’re using the Kleinunternehmerregelung (small business regulation), be ready to explain why and show that revenue thresholds haven’t been exceeded.
4. Payroll and Social Security
Payroll taxes and social contributions are often overlooked, especially in early-stage companies. Investors will review:
- Payroll tax filings and payment confirmations
- Wage tax (Lohnsteuer) documentation
- Social security (Sozialversicherung) declarations and payments
- Employment contracts with salary details
Mistakes here can become costly — both financially and reputationally.
5. Transfer Pricing (for International Operations)
If your company has subsidiaries or related-party transactions across borders, transfer pricing comes into play. Investors want to see:
- Documentation of how intercompany prices are set
- Any transfer pricing policies or agreements
- Reports prepared to comply with local tax laws
Lack of proper documentation can trigger large penalties or adjustments by tax authorities.
6. Tax Loss Carryforwards
Many startups run losses in the early years, accumulating tax loss carryforwards that can reduce future tax bills. Investors love to know:
- How much loss carryforward you have
- Whether there are risks of losing those benefits (e.g. due to changes in ownership)
Keep calculations and assessments showing how these amounts were determined.
7. Shareholder and Capital Structure
Tax consequences often stem from how your company is structured. Gather:
- Shareholder registers
- Shareholder agreements
- Capital increase documentation
- Convertible loan agreements
- Option pool details and employee equity plans
These documents help investors analyze potential tax implications tied to future exits or restructurings.
8. Pending or Past Tax Audits
If your company has undergone a tax audit (Betriebsprüfung), collect:
- Official notices
- Final audit reports
- Documentation of any findings or adjustments
- Evidence that any required payments were made
Transparency here is crucial. Investors prefer to know about past issues rather than discover them themselves.
9. Data Privacy and Tax Data
Financial documents often contain personal data, making GDPR compliance relevant for tax diligence. Be prepared to answer:
- How you store tax records containing personal data
- How long you retain these documents
- Whether your systems are secure and GDPR-compliant
10. Summary of Tax Risks
Finally, prepare a concise memo summarizing:
- Known tax exposures
- Any disputes or areas of uncertainty
- Mitigation steps taken
A clear risk overview shows professionalism and helps build investor trust.
Practical Tips for Smooth Due Diligence
- Start early. Don’t wait until investors ask for documents.
- Stay organized. Maintain a “due diligence” folder updated continuously.
- Work with advisors. Involve your tax advisor or legal counsel early in the process.
- Keep it clear. Avoid jargon in your summaries—clarity reassures investors.
- Be transparent. Don’t hide issues. Investors appreciate honesty.
The Bottom Line
Tax due diligence might not be the most exciting part of your funding or exit journey, but it’s one of the most critical. A well-prepared tax file helps avoid surprises, preserves your company’s valuation, and demonstrates that your team runs a disciplined business.
Treat tax due diligence as an ongoing process—not a last-minute scramble. By keeping your records clean and your risks documented, you’ll step into negotiations confidently—and keep your business moving forward.
