M&A in 2026: Detecting “Sleeping” Tax Liabilities in UAE Target Companies
As mergers and acquisitions evolve in the UAE, the rules of the game are changing, and understanding tax risk has never been more critical.
Mergers and acquisitions in the UAE have entered a new phase. In 2026, deals are no longer judged only by growth potential or market access. They are judged by how well buyers identify risk before it becomes real. Tax authorities are no longer taking a hands-off approach. Reviews are deeper, broader, and often triggered after a transaction is completed.
This change has pushed tax risk into the centre of deal value. What once felt like a routine compliance exercise now affects pricing and long-term returns. In many mergers and acquisitions, acquiring a UAE company’s tax risks can materially change how a deal performs after closing, even when the financials look clean.
This is where “sleeping tax liabilities” come into play. In a UAE mergers and acquisitions context, these are past tax exposures that stayed hidden simply because they were never tested. Old VAT treatments, early corporate tax positions, or ignored excise issues may not have caused problems before. A transaction is often what brings them to the surface.
This is why Hidden VAT liabilities M&A issues are so common in mergers and acquisitions. VAT errors rarely show up in financial audits. Incorrect classifications, missed reverse-charge obligations, or incomplete filings can sit unnoticed for years. Once ownership changes, scrutiny follows.
Corporate tax and excise risks behave similarly. As enforcement tightens and clarity improves, especially under the amendments to the UAE Tax Procedures Law 2026, historic positions are being reviewed more closely. What once seemed acceptable can quickly become costly.
For buyers, this creates a clear challenge. A clean audit no longer guarantees a clean deal. It does not protect projected returns or provide comfort on tax exposure. This is why a practical Tax due diligence checklist UAE 2026 is now essential for any serious mergers and acquisitions strategy.
As a result, buyers are increasingly relying on M&A advisory professionals in the UAE who understand how tax risk unfolds after completion. Strong Corporate tax advisory services and experienced M&A deal structuring experts have become critical to protecting value in mergers and acquisitions.
In 2026, tax risk in mergers and acquisitions does not announce itself; it waits, silently, until the deal triggers scrutiny.
The next step is understanding exactly where these hidden liabilities live and how to uncover them before it’s too late.
Why ‘Sleeping’ Tax Liabilities Are a Bigger Problem in 2026
Tax risks that once slept quietly can now wake up and hit a deal hard.
In 2026, mergers and acquisitions in the UAE are taking place amid a new enforcement landscape. Buyers can no longer rely solely on clean audits. Historic mistakes, minor oversights, and even past behaviours are under scrutiny.
The UAE’s New Tax Enforcement Architecture (2025–2026)
The UAE has reshaped how it enforces tax. VAT, Corporate Tax, and Excise are now part of a single, unified framework. That means old positions that were once ignored can suddenly become material liabilities. For anyone involved in a deal, this makes understanding Acquiring UAE company tax risks more important than ever.
Key parts of this reform package include:
- Federal Decree-Law No. 17 of 2025 (Tax Procedures Law): Gives authorities stronger powers to review past filings, demand documents, and enforce penalties. This makes a robust Tax due diligence checklist UAE 2026 essential for any serious buyer.
- Federal Decree-Law No. 16 of 2025 (VAT Law amendments): Expands VAT obligations, including historical transactions. Hidden VAT liabilities M&A can now surface even years later.
- Cabinet Decision No. 129 of 2025 (Administrative penalties): Introduces stiffer penalties for errors, late filings, and misreporting—turning minor oversights into costly surprises.
The significant change is that VAT, Corporate Tax, and Excise are no longer treated separately. Everything is connected, which means buyers must look at risk holistically. Past assumptions that one type of tax was safe no longer hold.
The Federal Tax Authority (FTA) now focuses on historic positions, documentation quality, and behavioural compliance. Even if numbers on paper were correct, gaps in records or inconsistent practices can trigger scrutiny.
In this world, working with M&A advisory in the UAE and expert Corporate tax advisory services isn’t just helpful, it’s critical for deal certainty.
Limitation Periods That Buyers Can No Longer Ignore
Understanding enforcement is one thing, but knowing how far back it reaches is another. In 2026, buyers in the UAE mergers and acquisitions can’t afford to assume that tax risks are limited to the last few years. Historical exposure now plays a direct role in deal certainty and value.
How Far Back Can Authorities Go?
The standard 5-year audit and refund limitation period still applies for routine reviews. But the game has changed for serious non-compliance. In cases of tax evasion or significant errors, authorities can reach back up to 15 years. That’s a long tail of potential liabilities that can unexpectedly surface during or after a transaction.
This extended reach affects more than just tax reporting; it hits the deal directly. Limitation periods now influence:
- Valuation models: Unassessed or hidden liabilities can reduce a target’s net asset value, making pricing assumptions unreliable.
- Escrow sizing: A more extended exposure period may require larger reserves to protect buyers against unforeseen claims.
- Completion risk: Transactions can stall or even fall through if historic issues trigger last-minute scrutiny or negotiations.
For any serious buyer, these realities make a targeted Tax due diligence checklist for UAE 2026 essential. It’s no longer enough to rely solely on audited financials. Acquiring UAE company tax risks now means understanding exactly how far back authorities can go and what can suddenly become payable.
The ‘Refund Trap’: How the 5-Year Statute of Limitations Really Works
Limitation periods set the boundaries of risk, but clever accounting moves can quietly extend them. For buyers in the UAE mergers and acquisitions, understanding how the standard 5-year rule interacts with refunds is critical. Otherwise, what feels like a closed period can suddenly reopen, creating unexpected liabilities.
The Standard Rule Buyers Assume Is “Safe”
Under the Tax Procedures Law, routine audits and refund claims are generally limited to the last 5 years. Many buyers assume this means older VAT periods are effectively off-limits.
This assumption is risky.
In reality, historical VAT positions can remain vulnerable if past filings were incorrect or incomplete, or if refunds are claimed late. Even when the target company appears clean, past reporting gaps can expose hidden VAT liabilities in M&A deals that were never considered.
How Refund Claims Keep Old Periods Alive
Refund claims can extend exposure far beyond what buyers expect. Filing a VAT refund, even within the standard 5-year window, can reopen historic audit exposure.
This is often called the “fifth-year refund” problem.
For example, a refund claimed in year five can extend the audit window by up to two additional years, dragging older periods back under scrutiny.
The transitional 2026 risk adds another layer. Companies claiming legacy VAT credits from 2018–2021 before their expiry often trigger audits that go further back than anticipated. Authorities use these refund claims as a reason to review supporting documentation and past behaviour, exposing risks that were previously assumed to be long closed.
For anyone evaluating acquiring a UAE company, tax risks highlight why relying on a clean financial audit is no longer enough.
A detailed tax due diligence checklist for the UAE 2026 can reveal areas where refund claims might extend liability and help structure M&A advisory in UAE strategies to protect value.
Experienced Corporate tax advisory services and M&A deal structuring experts can guide buyers through these nuances, ensuring historic exposures are identified, assessed, and mitigated before a deal closes.
Why Buyers Inherit Refund-Driven Audit Risk
Understanding refund-driven exposure is critical because it doesn’t disappear at closing. Even after ownership changes hands, historic VAT issues can follow the company into the buyer’s hands, creating real financial risk in mergers and acquisitions.
Refund audits frequently continue after share transfers because the FTA focuses on the entity, not the former shareholders. This means that even if the seller handled filings, or claimed refunds, whether correctly or incorrectly, the buyer can become liable for gaps, mistakes, or audits triggered by prior claims.
Simply put, buying a clean balance sheet doesn’t guarantee a clean deal.
The impact on deals can be significant. Refund-driven audits can delay completion while additional information is gathered. Escrow accounts may need to be increased to cover potential liabilities. And post-closing tax shocks can erode projected returns, especially if hidden VAT liabilities from M&A were not identified during due diligence.
For buyers, this underscores the importance of a thorough tax due diligence checklist for the UAE 2026. Partnering with experienced M&A advisory teams in the UAE and Corporate tax advisory services helps anticipate refund-driven risks, properly size escrows, and structure deals so that historic liabilities do not catch the buyer off guard.
Successor Liability: Why You Buy the Seller’s Mistakes
In 2026, buying a UAE company often means buying its history, both good and bad. Even if the financials look perfect, historic tax exposures can transfer automatically, turning old mistakes into new liabilities for the buyer.
Understanding successor liability is crucial to protecting value in mergers and acquisitions.
Share Deals vs Asset Deals in the UAE
Most acquisitions in the UAE are structured as share deals. This isn’t just a preference; it has practical consequences. When you acquire the shares, you also acquire the company’s TRN and its full tax history. This means any prior missteps, missing documentation, or unclaimed obligations now sit squarely on the buyer’s shoulders.
Even with a careful Tax due diligence checklist, UAE 2026 work, and share deals require deep scrutiny of historic filings. Hidden VAT liabilities M&A can follow the entity seamlessly, turning what seemed like a routine acquisition into a potential minefield if past errors are uncovered.
Why the FTA Does Not Care About Your SPA?
UAE tax law treats the entity itself as the continuing taxpayer. The Federal Tax Authority does not accept indemnities, warranties, or caps in a share purchase agreement (SPA) as protection. That means aggressive refund claims, misapplied VAT, or other historic issues are enforceable against the buyer, regardless of contractual protections.
This makes acquiring a UAE company tax risks a tangible deal factor. Clawback risk is real, especially for VAT refunds claimed by prior owners. Even post-closing negotiations cannot undo exposure once the authority initiates an audit.
When Exposure Extends to 15 Years
Certain situations push exposure far beyond the standard 5-year limitation period. Serious non-compliance, evasion, or intentional misreporting can extend liability to 15 years. Documentation gaps, behavioural indicators, and intent tests all feed into this calculation.
Legacy practices from the early VAT years (2018–2019) still matter in 2026. Buyers cannot assume historic positions are safe just because audits didn’t happen in the past. Robust M&A advisory in the UAE and expert Corporate tax advisory services are essential to identify and mitigate these long-tail risks before signing.
Identifying Red Flags Beyond the Balance Sheet
Financial statements tell part of the story, but they rarely reveal the complete picture of historic tax risk.
In 2026, buyers in UAE mergers and acquisitions must dig deeper to uncover hidden exposures that could threaten valuation, completion, or post-closing certainty. Spotting red flags beyond the balance sheet is now critical.
VAT and Refund Risk Indicators
Large VAT credit balances visible on the FTA portal are often the first sign that a target may carry Hidden VAT liabilities M&A risk. Weak or incomplete support for historic refund claims, misclassification of zero-rated, exempt, and out-of-scope supplies, or input tax recovery linked to suppliers later found non-compliant are all red flags.
Buyers should also watch for exposures under “knew or should have known” anti-evasion tests. Even if filings were technically correct, inconsistent practices or missing documentation can trigger scrutiny. A detailed Tax due diligence checklist for the UAE 2026 helps flag these risks early, allowing buyers to structure protections or negotiate appropriate warranties.
Reverse Charge Mechanism (RCM) Gaps
The removal of self-invoicing from 2026 does not reduce exposure. Missing RCM documentation for imports and cross-border services (2022–2025) can still result in penalties, even when VAT is economically neutral.
Inconsistencies between customs data, VAT returns, and accounting records often indicate potential audit triggers. For buyers, these gaps highlight why acquiring UAE company tax risks requires more than a surface-level review. Partnering with M&A advisory in UAE and expert Corporate tax advisory services ensures RCM exposures are properly assessed before closing.
Corporate Tax Maturity Risks (2024–2025 Filings)
Corporate Tax is still young in the UAE, but early filings can reveal structural weaknesses. Reviewing the first two Corporate Tax returns helps predict audit focus and identify risk areas. Misuse or misunderstanding of Small Business Relief, transfer pricing inconsistencies, undocumented related-party positions, or gaps between filings, management accounts, and audited financial statements all represent potential liabilities.
Free zone assumptions that previously offered comfort no longer always hold under Corporate Tax. Identifying these issues early allows buyers to proactively address risks and avoid post-closing shocks, making M&A deal structuring experts and robust Corporate tax advisory services indispensable.
The Tax Control Environment Buyers Often Miss
Even when the numbers look clean, the real risk often lives in how a company manages tax. In 2026, buyers in UAE mergers and acquisitions are discovering that weak or missing internal controls can turn routine processes into costly surprises.
Missing Documented Policies
A common red flag is the absence of documented tax policies and procedures. Without clear guidance, teams may misclassify transactions, misapply VAT rules, or overlook Hidden VAT liabilities M&A. Documented policies are the backbone of a reliable tax control environment.
Weak Internal Controls
Weak internal controls over VAT, RCM, and refund processes amplify risk. Historic errors can remain undetected until a deal triggers scrutiny. Ensuring controls are properly designed and followed is critical for any Tax due diligence checklist UAE 2026.
Lack of Board-Level Oversight
Lack of tax risk reporting at the executive or board level means past mistakes may never have been formally reviewed or corrected. Boards that do not monitor tax compliance leave companies exposed to penalties, clawbacks, and post-closing disputes.
Reliance on Informal Guidance
Relying on informal advice or outdated FTA guidance can perpetuate errors. In 2026, this is no longer a minor issue; it can directly affect acquiring UAE company tax risks and the accuracy of historic filings.
Unreviewed Historic Transactions
Historic restructurings or asset transfers that were never formally tax-reviewed also create exposure. Legacy transactions can trigger audits or clawbacks once a buyer acquires the company. Robust M&A advisory in the UAE and Corporate tax advisory services can help identify and mitigate these risks before signing.
The Technical Solution: The ‘Historic Tax Health Check’
If understanding risk is half the battle, verifying it is the other half. In 2026, standard tax due diligence alone is often not enough. Buyers in UAE mergers and acquisitions need a deeper, forensic approach to uncover legacy liabilities before they hit post-closing.
Why Standard Tax Due Diligence Falls Short
Traditional tax reviews focus on sampling rather than a full forensic review. They often prioritize filings over audit-ready evidence. While this may satisfy standard compliance requirements, it can completely miss legacy exposures, including hidden VAT liabilities, M&A, and historic Corporate Tax gaps. Simply ticking boxes does not give the certainty buyers need.
What a Historic Tax Health Check Covers
A proper Historic Tax Health Check goes beyond the basics. Key elements include:
- Forensic verification of high-value VAT refund claims to ensure they are legitimate and correctly supported.
- Reconciliation of FTA ledgers with ERP and trial balances to spot discrepancies before they become liabilities.
- Mapping refund claims to limitation and audit-exposed periods, identifying which historic periods remain “live” and why.
- Testing document readiness under the 2026 tax invoice and e-invoicing standards, ensuring records meet new compliance expectations.
This approach helps buyers identify acquiring UAE company tax risks that are invisible in standard audits and prepares them for negotiations, structuring, and post-closing management.
Timing the Review Within the Deal Lifecycle
Getting the timing right is key. A Historic Tax Health Check can be conducted at different points in a deal to maximize protection:
- Before signing: Spot potential red flags early, so you know what risks you’re taking on.
- Before completion: Use the findings to structure price adjustments, warranties, or escrow arrangements.
- After closing: Put controls in place and monitor the company to manage any legacy liabilities that might surface.
The 2026 Tax Due Diligence Checklist for UAE Buyers
In 2026, tax due diligence isn’t just a box to tick, it’s how you protect the deal. A single oversight can turn hidden liabilities into major problems after closing. Buyers in the UAE mergers and acquisitions need a straightforward, practical approach to spot risks early.
Key Areas to Review
- Tax registrations, deregistrations, and filing history: Make sure VAT, corporate tax, and excise registrations are up-to-date. Nothing should be assumed.
- FTA correspondence, audits, penalties, and voluntary disclosures: Past interactions can reveal hidden exposures or ongoing issues.
- Limitation periods across VAT, Corporate Tax, and Excise: Check which remain “live” and could be audited.
- Input tax on capital assets and major expenses: Verify claims were supported properly.
- Refund claims and audit exposure: Large or unusual refunds can trigger historic audits.
Governance and Controls
- Tax policies and board oversight: Strong internal processes matter. Weak systems can let small mistakes escalate.
- Data reconciliation: Compare the company’s records with FTA portal data. Mismatches are red flags.
Using Findings to Protect the Deal
Once you know the risks, the next step is translating them into protections in the SPA:
- Indemnities: Shift responsibility for historic tax issues to the seller.
- Warranties: Confirm the accuracy and completeness of all filings.
- Escrows: Hold funds to cover potential liabilities.
- Completion conditions: Make closing dependent on resolving or mitigating key exposures.
Conclusion: Bulletproofing the Acquisition
In 2026, tax is no longer just a back-office task; it has become a critical driver of deal value. Sleeping liabilities often destroy value after completion, not before signing, which means a clean-looking balance sheet can hide costly surprises. Refunds, limitation periods, and successor liability are now interconnected risks; overlooking one area can quickly expose a company to multiple liabilities.
Investing in a Historic Tax Health Check is far cheaper than facing a single FTA penalty. Early diligence allows buyers to identify, quantify, and mitigate risks before they become real financial shocks.
The final takeaway is simple: protect your investment before closing, not during an audit. Structuring the deal, negotiating appropriate warranties, escrows, and completion conditions, and leveraging expert M&A advisory in UAE and Corporate tax advisory services ensures both value and certainty.
FAQs:
Yes. In the UAE, the company itself is responsible for its taxes. Even if the SPA says the seller will handle past VAT, Corporate Tax, or Excise obligations, the FTA doesn’t care about that. You inherit whatever is unresolved. That’s why a proper Tax due diligence checklist UAE 2026 is essential before closing any deal.
The new laws extend exposure for serious non-compliance—sometimes up to 15 years. Buyers can no longer assume older periods are closed. Historic filings, refund claims, and legacy practices all need careful review because past mistakes can still surface and affect the deal.
Pending refunds are tricky. They can reopen older audit periods and trigger scrutiny that wasn’t expected. This might mean larger escrows, additional warranties, or specific pre-completion conditions to protect the buyer. It’s one of those hidden issues that only shows up after digging a bit deeper.
Yes. Even minority stakes carry risk if the buyer has operational influence. Full buyouts, of course, assume all historic liabilities. That’s why working with experienced M&A advisory in UAE and Corporate tax advisory services is crucial to understanding what you’re really taking on.
That can trigger penalties. Even if the data exists somewhere, the FTA requires it in the right format. Reconciling ledgers, validating filings, and double-checking everything is essential to reduce risk.
Yes. If you find liabilities after signing, it’s fair to renegotiate the price, increase escrow funds, or adjust indemnities. Doing this before completion protects you from nasty surprises later.
Not automatically. But it does attract attention. The entity itself remains liable for past taxes, so historic issues don’t disappear with a change in management or ownership.
Weak systems can signal negligence. Even small underpayments can lead to fines if the FTA believes the company didn’t act responsibly. Clear procedures, governance, and oversight go a long way toward preventing this.
Yes. Authorities and banks may require tax clearance before approving licenses, bank accounts, or financing. Ignoring historic issues can create real operational delays.
Review past filings, refund claims, and internal records carefully. A Historic Tax Health Check is the best way to spot hidden risks and quantify what could go wrong.
It can help, but coverage depends on accurate disclosure and proper diligence. Don’t assume insurance fixes every gap; you still need a thorough review of Acquiring UAE company tax risks.
Reorganizations or system changes often expose misclassified transactions, mismatched records, or gaps in documentation. This is usually when hidden VAT or other historic liabilities become visible.
Yes. Disclosures can draw attention to past errors, sometimes increasing fines or audit scrutiny. They need to be handled carefully, ideally with expert advice.
Missing invoices, unmatched ledgers, and misclassified transactions often appear during system updates or clean-ups. These events commonly reveal Hidden VAT liabilities M&A.
Set up formal tax policies, strengthen internal controls over VAT, RCM, and refunds, and introduce board-level oversight. It won’t erase past issues, but it stops them from happening again.
References
- Abdou, Mahmoud. ‘Ministry of Finance to Implement Amendments to the Tax Procedures Law Starting Early 2026’. Ministry of Finance – United Arab Emirates, 29 Nov. 2025,
https://mof.gov.ae/en/news/ministry-of-finance-to-implement-amendments-to-the-tax-procedures-law-starting-early-2026/. - Authority, Federal Tax. ‘Federal Tax Authority – United Arab Emirates’. Federal Tax Authority United Arab Emirates, https://tax.gov.ae//en/.
- Merge (or Acquisition) Foreign Entity.
https://www.moet.gov.ae/en/w/request-to-merge-or-acquisition-foreign-companies. - Pavithran, Lekshmy. ‘UAE Introduces Changes to Tax Rules Starting January 2026’. Gulf News: Latest UAE News, Dubai News, Business, Travel News, Dubai Gold Rate, Prayer Time, Cinema, 29 Nov. 2025,
https://gulfnews.com/business/tax-news/uae-introduces-changes-to-tax-rules-starting-january-2026-1.500363849. - Share Purchase Agreement – Short Form.
https://www.moet.gov.ae/documents/20121/0/DOCUMENT+APPROVED+BY+LEGAL+RESEARCH+COMMITTEE.docx/864ffc89-ea91-0ce0-368d-42dc431bc186?t=1687170921740. - The Administrative Penalties for Violation of Tax Laws in the UAE.
https://tax.gov.ae/Datafolder/Files/Legislation/2025/Cabinet%20Decision%20No.%2040%20of%202017%20and%20its%20amendments%20-%20publishing%2011%202025.pdf. - United Arab Emirates Legislations | Federal Decree by Law Concerning Tax Procedures.
https://uaelegislation.gov.ae/en/legislations/1625.
