One of the most dangerous “ticking time bombs” in M&A is the target company’s tax debts and back-tax assessment risk. Unlike commercial debts visible on the books, tax liabilities can quietly accumulate over many years and surface only when the tax authority conducts an inspection — sometimes years after the deal has closed. Is the buyer liable for these amounts?
Share deal: the target company remains the taxpayer
In a share deal, the target company’s legal personality does not change, so the target remains the taxpayer for all tax obligations arising before and after the transaction. Tax arrears, back-tax assessments, penalties, and late-payment interest all belong to the target as an independent legal entity.
This means the buyer bears no direct liability to the tax authority — the authority cannot demand that the buyer (the new shareholder) pay the company’s taxes. But do not mistake this for immunity: by acquiring the company, the buyer “buys” the tax risk through the enterprise’s value. Every dong of back taxes, penalties, and late-payment interest the company must bear directly erodes the value of the buyer’s investment. Economically, the tax risk is the buyer’s money.
The tax authority may inspect and assess back taxes after the M&A closes
A change of ownership does not “erase” the target’s tax obligations. The tax authority may fully conduct tax inspections of the company after the M&A transaction has closed and issue back-tax assessments for tax periods before the transfer.
This is where buyers are often complacent: assuming that once the deal is “closed,” the old company’s tax past no longer matters. The legal reality is the opposite — the company is still there, prior years’ tax records are still there, and the tax authority is not constrained by the change of ownership.
A 10-year risk horizon: minimum 10 years of tax due diligence
The most alarming aspect of tax risk is its very long assessment window. Under Clause 8, Article 45 of Tax Administration Law No. 108/2025/QH15 (effective from 01/7/2026), even after the statute of limitations for administrative tax penalties (05 years) has expired, the tax authority may still assess deficient tax amounts for the 10 years preceding the discovery of the violation.
The practical consequence is clear: the buyer’s tax due diligence must cover at least 10 years of the target’s tax records — not just the most recent 3–5 years as many deals still do. A filing error from 8–9 years ago can still turn into a back-tax assessment years after the buyer has owned the company.
Protecting the buyer: SPA and escrow mechanisms
Because tax risk cannot be fully eliminated through diligence, the share purchase agreement (SPA) must be designed as a “shield” for the buyer, with at least the following layers of protection:
- Seller’s tax representations: the seller represents and warrants that the company has fully and truthfully declared and paid taxes for all periods before closing, and has provided complete tax records for the buyer’s diligence;
- Indemnification: the seller undertakes to indemnify the buyer for all back-tax assessments, penalties, and late-payment interest arising from pre-closing tax periods — even if the assessment decision is issued many years later;
- Escrow — holdback of part of the purchase price: a portion of the purchase price is retained in an escrow account for a defined period after closing, as a source of compensation if the tax risk materializes. This is the most practical mechanism, since pursuing the seller for indemnification years later is always difficult.
These three layers must be tightly drafted by counsel, with a clear definition of “pre-closing tax periods” and an escrow release mechanism, to be effective when disputes arise.
Key takeaways for buyers
- In a share deal, the target company remains the taxpayer — tax arrears, back taxes, penalties, and late-payment interest stay with the company as a legal entity.
- The buyer is not directly liable to the tax authority, but bears the tax risk economically through the enterprise’s value.
- Tax inspection and back-tax assessment may occur after the M&A closes; under Clause 8, Article 45 of Tax Administration Law 108/2025/QH15, assessment may reach 10 years back even after the 5-year penalty limitation expires.
- Tax due diligence should cover at least 10 years, and the SPA should include the seller’s tax representations, indemnification for pre-closing periods, and an escrow holdback.
Frequently asked questions
Can the tax authority demand tax payment from the new shareholder?
Not directly. The taxpayer is the target company (a legal entity). But the value of the buyer’s investment is directly affected by the back taxes and penalties the company must bear.
How many years should tax due diligence cover?
At least 10 years, matching the 10-year retroactive assessment window under Clause 8, Article 45 of Tax Administration Law 108/2025/QH15.
What holdback percentage is reasonable for escrow?
This article gives no specific figure — the holdback depends on diligence findings and negotiation between the parties; specific advice is needed for each deal.
Applicable legal sources
- Tax Administration Law No. 108/2025/QH15 — Clause 8, Article 45 (back-tax assessment) — effective from 01/7/2026.
Concerned about hidden tax risks in an upcoming M&A deal? Contact FLAT Law Firm for diligence and protective-clause advice.
The legal content of this article was reviewed by FLAT’s AI Legal Council and submitted to the owner for approval; it is not the opinion of a human lawyer and does not replace legal advice for specific cases.
For reference only; not legal advice.
