Financial and tax due diligence in Romania for the renewable energy sector: 9 red flags to look out for | News Flash

As interest in renewable energy continues to rise, investors and acquirers must conduct thorough checks when evaluating companies in the solar energy and wind farm sectors. Financial and tax due diligence in Romania for the renewable energy sector is essential during mergers and acquisitions to identify hidden risks and avoid potential complexities.

Below are some common red flags to watch for:

1. Overstated revenue from Power Purchase Agreements (PPAs)

Many solar and wind companies rely heavily on long-term PPAs. A red flag arises when revenue projections assume overly optimistic pricing or include unsigned/off-market agreements. It’s critical to verify the terms, duration, and creditworthiness of counterparties.

2. Unclear ownership or lease agreements

Renewable projects often sit on leased land or involve complex joint venture structures. Missing, expired, or poorly documented land use rights or interconnection agreements can jeopardize the project’s viability.

3. Capitalization and debt misstatements

Given the capital-intensive nature of renewable energy projects, diligence must confirm that debt and equity structures are accurately reported. Look for red flags such as off-balance-sheet liabilities, undisclosed guarantees, or aggressive capitalization of development costs.

4. Inconsistent application of certain tax incentives

Solar and wind investments may qualify for reinvested profits tax exemption incentive. A lack of documentation or improper eligibility conditions for this incentive could expose the company to significant tax liabilities. Ensure proper timing and substantiation for all claimed tax incentives.

5. Accumulated tax losses

Review the treatment of any accumulated tax losses reported by the company, to ensure the relevant conditions for the carried forward tax losses are met.

6. Tax depreciation matters

Review the relevant tax depreciation schedules of the fixed assets of the company.  Inaccurate tax depreciation figures or misuse of accelerated depreciation can distort the tax position and lead to unexpected tax burdens.

7. Pending or historical tax disputes

Any ongoing disputes with tax authorities, particularly around VAT, import duties on equipment, or transfer pricing, should be reviewed closely. Red flags include unresolved audits, large contingent liabilities, or prior penalties.

8. Transfer pricing matters 

Renewable energy 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.

9. Environmental and regulatory non-compliance

While not strictly financial, failure to comply with local environmental regulations can result in fines, project shutdowns, or loss of permits, directly impacting revenue and asset value.

How we can help with financial and tax due diligence in Romania for the renewable energy sector

Financial and tax due diligence in Romania for the renewable energy sector is a critical step when assessing potential investments or acquisitions. Identifying red flags early helps investors avoid overpayment, mitigate risks, and secure long-term project sustainability. Our Romanian accounting and tax specialists are ready to offer you support in conducting a thorough due diligence review by evaluating the financial and fiscal processes in Romania, providing clarity and assurance in the context of mergers, acquisitions, or investments.

Anca Ghizdavu

Tax Director | Accace Romania

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Eugen Bursuc

Accounting Director | Accace Romania

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