Limits to the possibility of amortization of goodwill
Parallel to the introduction of group taxation, the possibility of the amortization of goodwill when acquiring a holding in a managing company subject to unrestricted taxation was introduced. In contrast to the general rules on income taxation, the purchase of a holding in a national or a foreign company, eligible for taking part in a group, was put on a par with the purchase of the enterprise managed by the acquired company.
According to the income tax law, the goodwill of a company acquired is calculated by considering the current value of assets and debts acquired in order to allow an amortization over a period of 15 years of the purchasing value as goodwill.
In the framework of group taxation, the goodwill is calculated by confronting the purchase cost with the net equity of the acquired company, increased by hidden reserves in the fixed assets non subject to amortization. The goodwill is limited to 50% of the purchase cost of the holding. The goodwill calculated in this manner has to be subject to amortization in equal amounts by the purchasing company over a period of 15 years.
The amortization of the goodwill determines a reduction of the book value of the holding in the acquired company and therefore the creation of a hidden reserve, which in the event of a sale is subject to taxation. Currently the law allows, however, to transform the hidden reserve in a book profit with a neutral fiscal effect if, for example, a merger between the acquiring and the acquired company is performed. The temporary fiscal effect of the amortization of goodwill thus becomes permanent because in future it will not be possible to sell the holding.
The lawmakers have now proposed the introduction of the subsequent taxation of the fifteenth of the writing off amounts as at the day of the merger. In this way the fiscal effect of the amortization of goodwill is annulled in the case of mergers provided the amount of the subsequent taxation is covered by the market value of the holding. Subsequent taxation will therefore take place only of the value of the holding is diminished since it was acquired.
Subsequent taxation of the writing off amounts can be avoided if instead of a merger between the acquired company and the parent company the splitting off of the enterprise of the acquired company in favour of the parent company is performed.