The purchase of a company is a complex process in which various tax issues play an important role. In particular, the taxation of goodwill, i.e. the intangible company value that is not directly related to assets or liabilities, is a challenging subject for buyers and sellers in the context of a company purchase. This article sheds light on the tax implications of goodwill in the company purchase. We also analyze how taxation is done in different jurisdictions.

1. What is goodwill and why does it play a role in the company purchase?

Goodwill means the amount paid by a buyer for an entity that exceeds the value of the identifiable assets and liabilities. It is also called company or business value. This intangible value is made up of factors such as brand name, customer relationships, know-how and market position. When taxing goodwill in the context of a company purchase, the amount of this value is considered to be decisive. The reason for this is that it has an influence on the tax burden of the parties involved. The way in which goodwill is recorded in the balance sheets and treated for tax purposes varies according to the applicable national rules.

2nd taxation of goodwill when acquiring a company in Germany

In accordance with § 246 (1) sentence 4 HGB, the goodwill acquired in return for payment is to be capitalized as a temporarily usable asset. According to § 253 paragraph 3 sentences 3 and 4 HGB in the version of 31.08.2015, the following rule applies: If, in exceptional cases, the expected useful life of an intangible asset of the fixed assets created by the company cannot be reliably estimated, scheduled depreciation on the production costs must be made over a period of ten years.

In tax law, goodwill is subject to special tax treatment. Goodwill is treated as an intangible asset after a company purchase under § 5(2) EStG, which entails corresponding taxation. In principle, it cannot be written off immediately. Rather, the goodwill is amortised over a period of fifteen years (§ 7 (1) sentence 3 EStG). This leads to a distribution of the control load over a relatively long period of time. A shorter depreciation period is also excluded if there is evidence in individual cases that the actual useful life will be shorter than fifteen years. Thus, the acquisition costs of goodwill have an annual tax reduction of only 1/15.

In the case of under-year acquisition, the proportional depreciation applies according to § 7 (1) sentence 4 EStG. This means that in the year of acquisition you can write off the goodwill for each calendar month following the acquisition, including the acquisition month. For example, if the purchase takes place in March, ten months are depreciable for this year.

International differences in the taxation of goodwill

However, the taxation of goodwill varies not only within Germany, but also internationally. US tax law, for example, treats goodwill under Internal Revenue Service (IRS) regulations. There it is possible to write off goodwill over a period of fifteen years, similar to in Germany. However, in some European countries, such as the UK, the taxation of goodwill is different. There, the goodwill as a taxable asset is usually not recognized. For buyers and sellers, this has an impact on the tax structure of a company purchase.

4. The tax effects of goodwill on the buyer

For buyers and sellers, the taxation of goodwill is of great importance, as it can affect the amount of tax burden after the company purchase. The buyer must ensure that the acquired goodwill is properly valued and recorded on the balance sheet in order to benefit from the depreciation possibilities. At the same time, he must be aware of the fact that in the event of a sale, the goodwill may have to be taxed. This may lead to a considerable tax burden.

5th tax design options for the transfer of goodwill

There are various tax options to use goodwill when buying a company. A common method is to divide the purchase price between different assets to minimize the tax burden. In this way, the buyer can separate goodwill from other assets such as machinery or real estate and use the tax benefits of depreciation in a targeted manner. One recommendation is to plan the structure of the purchase in advance in order to avoid tax disadvantages.

6. The taxation of goodwill in the company purchase – Conclusion

The taxation of goodwill is an important but also complex aspect of the company purchase. Buyers and sellers should deal intensively with the tax implications of goodwill valuation and depreciation. This is the only way to make the tax burden optimal. Especially in international transactions, it is important to take into account the different taxation regulations of the respective countries. Only careful planning based on sound tax advice ensures that the purchase of a company is efficient and tax-advantageous, taking into account goodwill.