Due Diligence in Romania for the IT sector: Red flags to look out for | News Flash

Due diligence in Romania for the IT sector is essential for understanding the real risks behind fast-growing technology companies. The following chapters outline the most common red flags investors should assess before acquiring or investing in an IT business.

Financial and Tax Due Diligence Red Flags in Romania for the IT Sector

IT companies present unique risks tied to intangible assets and human capital. Proactive due diligence across financial, payroll, and legal areas helps investors and acquirers avoid surprises and unlock sustainable value. These companies, particularly SaaS and software providers, often show strong growth, but complex financials.

 Here are key red flags to watch for:

Aggressive revenue recognition

Revenue from multi-year contracts or subscriptions may be prematurely recognized. Look for:

• Inconsistent application of IFRS 15/ASC 606
• Bundled services without proper allocation (e.g., support vs. license fees)

Overvaluation of intangibles or deferred costs

Tech firms often capitalize development or marketing expenses. Red flags include:

• Poor documentation of capitalized R&D
• Unsupported software asset valuations

Customer concentration

High dependence on a few large customers increases risk. Evaluate:

• Revenue by customer
• Contract renewals and churn rates

Transfer pricing matters

Tech companies operating in Romania normally are part of multinational groups, conducting various intragroup transactions. Red flags include:

• No transfer pricing documentation available for the Romanian company, as per the Romanian tax legislation
• The relevant pricing might not be in line with the transfer pricing rules in Romania

Accumulated tax losses

Tech companies (especially during investment phases) often accumulate tax losses, which are available to be carried forward for future periods. Risks arise when:

• Losses do not actually respect the relevant conditions for carried forward and they face the risk of expiration

Relevant IT or R&D tax incentives in Romania

As per the Romanian tax legislation, tech companies in Romania have had the option of either use the relevant R&D and IT related exemptions. Please also evaluate:

• Whether the relevant conditions for applying these tax incentives were met and whether the relevant documentation is available in order to sustain the relevant tax incentives.

Improper VAT handling

Cross-border digital services often trigger indirect tax compliance issues. Watch for:

• No VAT registration in key jurisdictions
• Uncollected VAT on digital goods or SaaS in foreign states.

Payroll Due Diligence Red Flags in IT Companies

Human capital represents the main core asset in IT companies, which makes payroll diligence crucial. The following are the most important red flags:

Employee vs. contractor misclassification

Technology firms often use freelance developers or global talent. Misclassifying contractors can lead to:

• Payroll tax liabilities
• Incorrect application of tax incentive schemes (e.g. R&D related exemption)
• Retrospective benefit claims or lawsuits.

Inconsistent accounting treatment for Stock Option or ESOP

Equity compensation is common but often poorly handled. Warning signs includes:

• Missing formal option agreements for employees and lack of board approvals
• Failure to properly value options according to applicable regulations (e.g., 409A rules in the U.S.)

Unpaid or accrued bonus/commission liabilities

Unrecorded variable pay can skew liabilities. Red flags involve:

• Absence of a clear and documented bonus policy
• Disputes over unpaid commissions

Global workforce compliance gaps

IT companies often scale fast with remote teams. Key issues:

• No employment contracts aligned with local law
• Absence of payroll registration or failure to comply with mandatory local benefits

IP ownership not secured from employees/contractors

Failure to assign Intellectual Property rights in employment or contractor agreements is a common and costly mistake.

Legal Due Diligence Red Flags in Romania for the IT companies

Legal due diligence in IT companies in Romania focuses on IP, contracts, and compliance. Common red flags include:

Unclear IP ownership

If developers (especially freelancers or offshore teams) haven’t signed proper IP assignment agreements, the company may not own its core product.

Open source license violations

Using open-source libraries without compliance (e.g., GPL, AGPL) can:

• Compromise proprietary software
• Require source code disclosure

Weak data privacy and security compliance

Failure to comply with regulations like GDPR, CCPA, or industry-specific standards (e.g., HIPAA for health tech) can lead to:

• Regulatory fines
• Customer loss or reputational damage

Problematic customer or vendor contracts

IT companies may have:

• One-sided liability or SLA terms
• Contracts missing key protections (e.g., data processing addendums)

Ongoing or past legal disputes

Review for:

• IP infringement claims
• Employee lawsuits (especially around stock options or termination)

How we can help with financial, tax, payroll and legal due diligence in Romania for the IT sector

IT companies in Romania may conceal significant risks beneath the appearance of rapid growth. A well-structured due diligence analysis across financial, tax, payroll and legal areas is essential for identifying risk indicators that can affect the transaction value and long-term viability.

Our Romanian experts are ready to support you in conducting a thorough due diligence review by evaluating the financial, fiscal, legal and payroll processes, providing clarity and assurance in the context of mergers, acquisitions or investments in the IT sector in Romania.

Anca Ghizdavu

Tax Director | Accace Romania

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Rodica Ștefan

Senior Manager Payroll and HR Outsourcing Services | Accace Romania

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Eugen Bursuc

Accounting Director | Accace Romania

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Silviu Constantin

Legal Director | Accace Romania

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