Tax Appeals Court ruled on admissibility of goodwill amortization in case of a gradual group acquisition

Overview

In its decision of 6 July 2020 (Ro 2019/13/0018), the High Administrative Court ruled that a “phased” group acquisition (group acquisition in which in a first step domestic entities are acquired and subsequently other – usually foreign – group entities are acquired) does not lead to an exclusion of interest deduction from a purchase price financing and goodwill amortization in the context of group taxation. Although the Tax Appeals Court (7.3.2022, RV/5100970/2018) did not consider goodwill amortization to be permissible for a different reason in the present decision, the legal view on the phased group acquisition was again confirmed in this decision.  

Facts

Group N acquired another group A from an external seller as of 31 December 2006. Also, as per 31 December 2006, 100% of the shares in company A were contributed to the acquiring Austrian company N in accordance with Art III Reorganization Tax Act. Due to the acquisition (contribution), goodwill amortization was claimed for the first time in the tax return 2007of company N in the context of group taxation.

During a tax audit, the tax office refused to deduct the goodwill amortization and issued new assessment notices. According to the tax office a harmful group relationship had already existed when the shares of A were contributed to N. In addition, a goodwill amortization shall only be considered insofar as the tax advantage from the goodwill amortization could have affected the assessment of the purchase price at the time of the initial acquisition of the shares. According to the tax office, this was not the case due to the contribution at market value. An appeal against the new assessment notices was filed with the Tax Appeals Court.

Decision of the Tax Appeals Court

The Tax Appeals Court had to assess whether a third-party acquisition had been affected and referred to the above-mentioned High Administrative Court decision. In the present case, the entire group A was initially acquired by group N from a nonaffiliated seller. The subsequent contribution of the acquired company A to the existing company N still constituted a third-party acquisition in the opinion of the Tax Appeals Court. Contrary to the legal view of the tax office, the Tax Appeals Court confirmed the existence of a third-party acquisition in this constellation.

However, in the Tax Appeals Court’s view, the tax advantage from the admissibility of a goodwill amortization resulting from the reorganization could not affect the enterprise value (contribution of A to fair market value). Thus, the acquiring company N could not assume beyond doubt that the goodwill amortization was due for this participation. The deduction of goodwill amortization was therefore denied. An ordinary appeal to the High Administrative Court was admitted.

Conclusion

The Tax Appeals Court confirms that a phased group acquisition (in this case acquisition with subsequent contribution) is not detrimental to goodwill amortization in the tax group. Due to the comparable provision of sec 12 para 1 (9) CITA on group acquisitions, the Tax Appeals Court’s statement on group acquisitions is also applicable to interest expenses in our view. However, due to the explicit focus on a possible impact on the purchase price, goodwill amortization is excluded in the case of a contribution at fair market value. An ordinary appeal was filed against the decision of the Tax Appeals Court; the subsequent decision of the High Administrative Court remains to be seen.