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In article no. 64, we reported on a ruling by the Federal Tax Court under the valuation law as in force through December 1992 (ruling of 4 September 1996 - BB 1996, 2608). The court categorically rejected the amortisation of purchased trademarks absent special circumstances, e.g. a showing that the trademark is only of value with respect to a particular product with a fixed lifetime.

In our article, we pointed out that there was reason to suppose that the tax authorities would not apply the court's reasoning for income tax purposes. Official assurances by the tax authorities to this effect appeared possible.

The Federal Ministry of Finance has now given such assurances in a directive dated 27 February 1998 (DStR 1998, 421). The directive states that the ruling of 4 September 1996 has no validity for income tax purposes. Although legally renewable without time limit, trademarks have a limited useful life from an economic point of view even if customer recognition of the trademark is continually reinforced by regular advertising. The directive provides that the lifetime of a trademark may be assumed to be 15 years (as for purchased goodwill) unless the taxpayer provides "reasons and, if need be, proof" showing the useful life to be shorter.

Purchased licenses for the sale of medication (Arzneimittelzulassungen) are excluded from the scope of the directive, however. Since the five year licenses are renewable without limit, they are not subject to regular decline in value. Scheduled amortisation of such licenses is thus not permissible in the view of the tax authorities. The directive states, however, that an extraordinary writedown to going concern value can be justified by the facts of a specific case. Presumably, this would apply when it can be shown that the medication in question is outdated or has permanently lost market share to other medications.

The failure of the tax authorities to apply the Federal Tax Court's 1996 ruling for income tax purposes is justified by differences between the income tax law and the valuation law under which the 1996 case was decided, namely the Valuation Act in force through December 1992. Under the "new" valuation law (sec. 109 (1) BewG), which governs tax years from 1993 on, the values in the tax balance sheet are by and large controlling for purposes of the Valuation Act as well. The old valuation law applied principles unique to itself in many more respects. In an essay written in January 1997, Stein and Ortmann (BB 1997, 199) argue that the principle of conservative accounting (prudence principle), which applies for purposes of the tax balance sheet and hence for income tax purposes but not under the old Valuation Act, generally justifies scheduled amortisation for purchased trademarks. The authors, who appear to have been involved in the litigation, state that the tax authorities allowed for income tax purposes the same trademark amortisation which they challenged under the Valuation Act. Since from 1993 on the values of the tax balance sheet apply as regards trademarks for general valuation purposes as well, the authors believe that the same case would have come out differently under the Valuation Act in force for tax years after 1992. More importantly, as the new directive now confirms, the decision does not apply for income tax purposes.

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