How can foreign investors protect themselves against hidden tax liabilities when acquiring an energy company in Turkey? A 2026 guide covering tax due diligence, share deals, asset deals, SPA warranties, tax indemnities, escrow and purchase price protection.

Acquiring an energy company in Turkey can expose a foreign investor to tax liabilities created years before the acquisition. This risk is particularly important when the transaction is structured as a share deal, because the buyer acquires shares in the existing project company rather than creating a new legal entity. The company continues to exist after closing together with its historical tax position, accounting records, previous transactions and potential liabilities.

A solar, wind, hydroelectric, geothermal or other power generation company may appear financially healthy while still carrying significant undisclosed tax exposure. Historical VAT treatment, corporate income tax calculations, withholding obligations, related-party transactions, shareholder loans, depreciation practices, employment taxes or previous restructurings may later become the subject of a tax inspection.

The buyer may not have caused any of these problems. Nevertheless, once it owns the company, an assessment imposed on the target can reduce project cash flow and therefore the value of the investment.

For foreign investors, tax due diligence should therefore answer two separate questions: what historical tax risks exist, and who will economically bear those risks if they materialize after closing?

Why Hidden Tax Liabilities Are Particularly Important in a Share Deal

In a share acquisition, ownership of the company changes but the target company itself generally remains the same legal entity. Its historical rights and obligations therefore do not disappear at closing. This is commercially convenient because licenses, project contracts, employees, land rights and other relationships can remain within the same project company, but the same continuity applies to historical liabilities.

Suppose a foreign renewable energy fund purchases 100% of a Turkish solar project company in September 2026. In 2027, the target becomes subject to an inspection concerning transactions carried out several years before the acquisition. If additional tax, penalties or interest are assessed against the project company, the financial burden may ultimately affect the buyer’s investment even though the relevant conduct occurred entirely under the seller’s ownership. The buyer therefore needs contractual recourse against the seller rather than assuming that the change in ownership isolates it from historical tax exposure.

Tax Due Diligence Should Begin Before the SPA Is Signed

Foreign investors should not postpone tax analysis until immediately before closing. Material tax exposure can influence the transaction structure, purchase price, representations and warranties, indemnities and even the decision whether to proceed with the acquisition.

The review should normally cover all material open tax periods and should be coordinated with legal and financial due diligence. Tax returns should be compared with accounting records, audited financial statements, bank transactions and material contracts.

Unusual inconsistencies deserve particular attention. If management accounts show substantial revenue while tax records reflect materially different figures, the buyer should establish the reason before signing.

Corporate Income Tax Exposure

Corporate income tax is one of the first areas requiring review.

The buyer should examine whether taxable income was properly calculated and whether deductions claimed by the project company were legally supportable. Particular attention should be given to unusual expenses, related-party payments, financing costs and large one-off deductions.

An energy company may have significant expenses associated with construction, financing, consulting, management services and equipment procurement. The buyer should determine whether the historical tax treatment of these items can withstand scrutiny.

A disputed deduction that appears small relative to construction costs can still create substantial exposure once penalties and interest are considered.

VAT Risks in Energy Projects

VAT treatment deserves separate examination because energy companies can enter into high-value transactions involving construction, equipment procurement and operational services.

Potential issues may arise from EPC invoices, equipment purchases, consulting services, imported components, related-party transactions or VAT deductions.

The buyer should investigate whether invoices supporting material VAT deductions are genuine, properly recorded and connected with the company’s business activities.

A large accumulated VAT position should never be treated merely as a balance-sheet figure. Its legal and documentary basis should be tested.

Withholding Tax Liabilities

Energy companies frequently make payments to contractors, consultants, employees, shareholders and sometimes foreign service providers.

The buyer should examine whether applicable withholding obligations were correctly identified and fulfilled.

Cross-border arrangements deserve enhanced attention because the tax treatment may depend on the character of the payment, applicable domestic rules and relevant international tax arrangements.

Historical errors can create exposure for the target company even after the relevant service provider has left the project.

Related-Party Transactions

Related-party dealings are among the most important areas in energy acquisition tax due diligence.

A project company may have purchased equipment from a shareholder affiliate, paid management fees to a group company, received shareholder financing or entered into EPC and O&M arrangements with related entities.

The buyer should examine whether these transactions were commercially genuine and appropriately documented.

Payments significantly above market value, unexplained consulting fees or unusual transfers to shareholders should receive additional scrutiny.

Transfer Pricing Risks

Transactions between related companies can create transfer-pricing exposure.

A foreign buyer should identify all material related-party transactions and determine whether pricing and documentation support the positions historically adopted by the target.

This can be particularly important where a Turkish project company has received services or financing from foreign group entities.

The existence of a written contract does not itself prove that the price or transaction structure is defensible.

Shareholder Loans

Renewable energy projects are frequently financed partly through shareholder loans.

The buyer should identify:

Principal Amount → Interest Rate → Accrued Interest → Repayments → Currency → Related-Party Status → Tax Treatment.

A shareholder loan can affect both valuation and tax exposure.

The SPA should also specify whether shareholder debt will be repaid, assigned, capitalized or remain outstanding after closing.

Financing Costs

Power projects commonly carry substantial bank debt.

Historical deductions associated with interest and other financing costs should therefore be reviewed carefully.

The tax team should reconcile financing agreements with accounting treatment and tax returns.

If acquisition valuation assumes a particular net-debt amount, tax liabilities associated with financing should also be incorporated into the broader transaction analysis.

Depreciation of Power Plant Assets

Energy projects contain substantial depreciable assets, including turbines, solar modules, inverters, transformers, electrical equipment, buildings and other infrastructure.

Incorrect classification or depreciation treatment can distort historical taxable income.

The buyer should review major fixed-asset categories and determine whether accounting and tax treatment is consistent with the relevant framework.

This becomes particularly important where the project has undergone substantial capacity expansion or equipment replacement.

EPC and Construction Costs

Construction-stage tax treatment can create risks that remain hidden until years after commissioning.

The buyer should review major EPC invoices, additional works, contractor settlements and capitalized costs.

Large unexplained increases in project construction costs should be investigated.

Where the EPC contractor was related to the seller, enhanced scrutiny may be appropriate because both transfer-pricing and corporate governance issues can arise.

Imported Energy Equipment

Wind turbines, solar equipment, battery systems and specialized electrical components may be imported.

The buyer should therefore coordinate tax due diligence with customs due diligence where material imported equipment exists.

Historical disputes concerning customs valuation, import taxes or classification can create liabilities that ordinary corporate tax review may overlook.

Employment-Related Tax Exposure

Energy companies employ engineers, technicians, administrative personnel and other workers.

Payroll and related withholding practices should therefore be examined.

Particular attention should be given to bonus arrangements, allowances, expatriate personnel and payments made outside ordinary payroll systems.

An undisclosed employment-tax problem can affect numerous employees simultaneously and therefore become material.

Payments to Foreign Consultants

Energy projects frequently use international engineering, technical and financial consultants.

The buyer should examine significant payments made to foreign service providers and the tax treatment applied by the target.

The nature of the service, location of performance and applicable international arrangements may affect the analysis.

Large recurring foreign consultancy payments without adequate documentation should be investigated before closing.

Historical Tax Audits

The seller should disclose every material tax audit, assessment, settlement and pending proceeding involving the target.

The buyer should not restrict its inquiry to cases currently before a court.

Previous inspections can reveal areas that authorities have already questioned and may provide useful indications of recurring compliance weaknesses.

The underlying inspection reports and correspondence should be reviewed where material.

Pending Tax Investigations

A pending investigation is especially important because the amount of liability may not yet be known.

The seller may therefore argue that no liability currently exists.

For acquisition purposes, however, uncertainty itself has value.

The buyer should estimate potential exposure and determine whether it should be addressed through a specific tax indemnity, escrow or purchase price retention.

Tax Litigation

Pending tax litigation should be reviewed independently.

The investor should determine:

the disputed amount,

potential penalties and interest,

current procedural stage,

legal arguments,

available security,

and possible financial impact.

A seller’s statement that a case is “expected to be won” should not replace independent legal analysis.

Tax Amnesty or Restructuring History

The buyer should determine whether the project company has historically benefited from tax restructuring, settlement or similar mechanisms.

Such history does not automatically indicate wrongdoing, but it can reveal previous compliance problems.

The underlying liabilities should be understood before the buyer relies on the apparent clean status of current accounts.

Tax Certificates Are Not a Substitute for Due Diligence

A document showing no currently outstanding tax debt can be useful, but it does not necessarily prove that no historical exposure exists.

A future audit can potentially identify liabilities relating to an earlier period.

The buyer should therefore distinguish between:

Currently Assessed Tax Debt and Potential Historical Tax Exposure.

The second category is precisely where acquisition warranties and indemnities become important.

Tax Representations and Warranties in the SPA

A foreign buyer acquiring shares in a Turkish energy company should consider detailed tax representations rather than relying exclusively on a general statement that the company complies with law.

Depending on the transaction, warranties may address the proper filing of returns, payment of assessed taxes, disclosure of investigations, maintenance of records and absence of undisclosed tax disputes.

The wording should be adapted to the due diligence findings.

A generic tax warranty copied from another transaction may fail to address the specific exposure identified in the energy company.

Why a Tax Indemnity Can Be More Important Than a Warranty

A tax indemnity can specifically allocate pre-closing tax exposure to the seller.

The commercial principle is relatively simple:

Tax relating to the seller’s ownership period should, subject to the negotiated agreement, remain the seller’s economic responsibility.

The drafting is more complicated.

The indemnity should define the relevant taxes, periods, penalties, interest, exclusions, notification requirements, defense of claims and payment procedure.

Without clear drafting, the parties may later dispute whether a particular assessment falls within the indemnity.

Specific Indemnity for an Identified Tax Risk

Suppose due diligence identifies an ongoing dispute concerning VAT deductions connected with construction invoices.

The parties already know about the problem.

A general tax warranty may be qualified by disclosure of the dispute.

The buyer should therefore consider a specific indemnity covering the identified exposure.

This can include agreed treatment of tax, penalties, interest and associated costs.

Pre-Closing vs Post-Closing Tax Periods

The SPA should clearly determine responsibility where a tax period crosses the closing date.

For example, closing occurs on September 30, but the relevant tax period extends beyond that date.

The parties need a mechanism for allocating liabilities attributable to the pre-closing and post-closing portions.

Ambiguous allocation can create unnecessary disputes.

Seller Control of Tax Proceedings

Sellers often request the right to participate in or control proceedings where they bear the financial exposure under an indemnity.

The buyer, however, owns the company after closing.

The SPA should therefore balance both interests.

The seller should not be permitted to conduct litigation in a way that damages the target’s continuing relationship with authorities or creates adverse consequences for post-closing periods.

Buyer Cooperation Obligations

The seller may require reasonable cooperation from the buyer in defending historical tax claims.

This can include access to records, personnel and documents.

The agreement should define these obligations carefully so that cooperation does not become unnecessarily disruptive to the acquired business.

Escrow as Protection Against Tax Risk

A tax indemnity is only valuable if the seller remains capable of paying.

Suppose the seller distributes the entire purchase price immediately after closing and later becomes insolvent.

The buyer may have a strong contractual claim but no realistic source of recovery.

For this reason, foreign investors may negotiate an escrow arrangement where a portion of the purchase price remains secured for an agreed period.

Purchase Price Retention

Retention provides another mechanism.

Instead of paying the entire consideration at closing, the buyer retains part of the amount until specified risks expire or are resolved.

This can be particularly effective where due diligence has identified a pending tax investigation with a reasonably quantifiable maximum exposure.

Bank Guarantee

Depending on the transaction, the buyer may seek a bank guarantee or other security supporting the seller’s indemnity obligations.

The appropriate mechanism depends on the seller’s financial strength, risk amount and expected duration.

Purchase Price Adjustment

Some tax issues should affect valuation directly rather than being left entirely to post-closing claims.

If a liability is sufficiently certain, the buyer may negotiate a reduction in purchase price.

The commercial distinction is useful:

Known and Quantifiable Liability → Price Adjustment

Known but Uncertain Liability → Specific Indemnity / Escrow

Unknown Historical Exposure → Tax Warranties / General Tax Indemnity

Tax Covenant Between Signing and Closing

Where signing and closing occur on different dates, the SPA should regulate how the target conducts its tax affairs during the interim period.

The seller should generally not take extraordinary tax positions, settle material disputes or materially alter tax practices without addressing the buyer’s interests under the agreement.

This prevents the seller from changing the company’s tax profile immediately before completion.

Leakage and Tax Payments

In a locked-box transaction, tax-related payments to the seller or its affiliates may also require analysis under leakage provisions.

Unusual payments described as tax reimbursements, management charges or intercompany settlements should be reviewed carefully.

Asset Deal vs Share Deal for Tax Risk

An asset acquisition may allow the buyer to avoid certain company-level historical liabilities because it does not acquire the seller’s shares.

However, an asset deal does not automatically eliminate tax risk.

The transaction itself can create taxes, transfer costs and other liabilities. Certain public liabilities or business-transfer consequences may also require separate analysis.

Therefore, the buyer should compare the total tax consequences of both structures rather than assuming that an asset deal is inherently safer.

Example: Hidden VAT Liability After Solar Project Acquisition

A foreign investor acquires 100% of a Turkish solar project company.

Eighteen months later, historical VAT deductions connected with construction invoices are challenged.

The relevant invoices relate entirely to the seller’s ownership period.

If the SPA contains an appropriately drafted tax indemnity covering pre-closing liabilities, the buyer may seek recovery from the seller subject to the agreed terms.

Without such protection, the economic cost may remain inside the acquired project company.

Example: Wind Project With Related-Party EPC Contract

A foreign investor acquires a wind project whose original EPC contractor was another company controlled by the seller.

Due diligence identifies unusually high construction charges and substantial intercompany payments.

The buyer should investigate transfer-pricing and tax implications before closing and determine whether specific contractual protection is necessary.

Example: Tax Investigation Pending at Closing

The target is already under investigation when the SPA is signed, but no assessment has yet been issued.

The seller insists that the investigation will result in no liability.

Instead of accepting that prediction, the buyer may negotiate a specific indemnity supported by escrow.

If the investigation ends without liability, the escrow can be released according to the agreed mechanism.

Red Flags in Energy Company Tax Due Diligence

Foreign buyers should investigate particularly carefully where they discover missing tax returns, significant inconsistencies between accounting and tax records, large unexplained VAT balances, repeated related-party payments, undocumented shareholder loans, unusually high consultancy expenses, unexplained foreign transfers, related-party EPC arrangements, unresolved tax audits, substantial cash transactions, aggressive depreciation practices, incomplete fixed-asset records or resistance from the seller to providing historical tax documentation.

These findings do not automatically mean that the acquisition should be abandoned.

They do mean that the buyer should quantify the risk and protect itself contractually before closing.

2026 Buyer Protection Strategy

For a foreign investor acquiring a Turkish energy company in 2026, tax protection should generally operate in several layers:

Tax Due Diligence → Risk Quantification → Purchase Price Adjustment → Tax Warranties → General Tax Indemnity → Specific Indemnities → Escrow or Retention → Claim Procedure → Post-Closing Cooperation.

No single mechanism provides complete protection.

Due diligence identifies the problem. The SPA allocates the risk. Security mechanisms increase the probability that the buyer can actually recover if the risk materializes.

Frequently Asked Questions

1. Does buying shares in a Turkish energy company expose the buyer to historical tax liabilities?

Potentially yes. The target company continues to exist after the acquisition, so historical tax liabilities can remain within it.

2. Can tax liabilities arise after closing even if no tax debt existed on the closing date?

Yes. A later audit or assessment may concern transactions occurring before the acquisition.

3. Is a tax debt certificate enough protection?

No. It can confirm certain existing assessed liabilities but does not replace historical tax due diligence.

4. What is a tax indemnity?

It is a contractual mechanism under which the seller agrees to bear specified tax liabilities, commonly including agreed pre-closing exposure.

5. Why are specific tax indemnities necessary?

They are useful when due diligence has already identified a particular risk, such as an ongoing VAT investigation or disputed tax assessment.

6. Can the buyer retain part of the purchase price?

Yes. Purchase price retention or escrow may be negotiated to secure potential tax claims.

7. Should shareholder loans be reviewed?

Yes. Their amount, interest, tax treatment and treatment at closing can materially affect the transaction.

8. Are related-party transactions a major tax risk?

They can be, particularly where the target has paid significant amounts to seller-affiliated companies without strong commercial documentation.

9. Does an asset deal eliminate historical tax exposure?

Not automatically. Asset transactions have their own tax consequences and may involve other forms of liability that require separate analysis.

10. What is the safest approach for a foreign buyer?

Complete tax due diligence before signing, quantify identified exposure and translate every material risk into appropriate purchase-price protection, warranties, indemnities or security.

Legal Support for Foreign Investors Acquiring Energy Companies in Turkey

Hidden tax liabilities can convert an apparently profitable power project into a significantly more expensive investment after closing. Foreign investors should therefore analyze tax exposure together with corporate, regulatory, financing and contractual due diligence rather than treating taxation as a separate closing formality.

Firat Fesih Kaya Law Office assists foreign investors and international energy companies with acquisitions of solar, wind and other energy projects in Turkey. Firat Fesih Kaya can assist with transaction structuring, legal due diligence, SPA negotiations, tax-risk allocation, representations and warranties, indemnity structures, escrow arrangements and post-closing disputes.

The objective before closing should be clear: identify historical tax exposure, determine who bears it and ensure that contractual protection is financially enforceable if the liability appears after the acquisition.

Phone: +90 312 434 22 22
Mobile Phone: +90 532 769 22 22
Email: info@firatfesihkaya.av.tr
Address: Mevlana Boulevard No: 221, Yildirim Tower, Balgat, Cankaya / Ankara, Turkey