Buying a Chinese company and the risks of former owners avoiding VAT, payroll, and other taxes
Kurt Morrow (Marketing Coordinator, Proformative)
| May 4, 2011The following question was asked by an attendee at a recent Proformative China M&A, Tax and Structure webinar: Can you talk about buying a Chinese company and the risks of the former (presumably Chinese) owners avoiding various VAT, payroll, and other taxes and having that come back to haunt the acquiring entity? Any practical advice in how to spot and avoid these situations?
Answers
Company: Baker & McKenzie
It is very common that a domestic Chinese entity has some hidden liabilities, such as tax, payroll, social securities, environmental, etc. A share deal might be more tax efficient for seller, but the buyer will inherent the hidden liabilities of the target. In order to get a clean business, the foreign buyer can consider setting up a new entity in China and use the new entity to purchase the assets from the target. However, as one can imagine, seller is highly motivated to insist upon a share deal, creating a tension in many transactions.