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In a ruling dated 4 September 1996 which became public at the end of last year (BB 1996, 2608), Germany's highest tax court, the Bundesfinanzhof or Federal Tax Court, surprised the tax consulting profession and the affected industries by appearing to disallow scheduled amortisation on purchased trademarks.
At issue in the case was the proper valuation of purchased, as opposed to self-created, trademarks under the Valuation Act for purposes of determining the standard assessed value of a business (of relevance e.g. for the net worth tax and the trade tax on capital). Strictly speaking, the Court was not ruling on the merits of this issue, but rather on an appeal taken by the taxpayer from the lower court's denial of a motion to stay collection of the tax pending the outcome of the proceeding on the merits. Still, the detailed reasons given by the Court in affirming the denial of the stay left little doubt as to its position on the substantive question.
The Court ruled that no serious doubt existed as to the correctness of disallowance of deductions for amortisation of purchased trademarks where the trademarks were used in the business on an ongoing basis. The value of such trademarks was in the Court's view not subject to depletion over time because trademark protection can be renewed every ten years without limit under German law. Hence, trademarks never expire as a legal matter. Furthermore, there were no contractual time limits in the case decided. The trademarks were consistently used in the business without any indication that their economic value might some day decline. The Court therefore considered scheduled amortisation to be out of the question. Nor were any facts pleaded which might justify an extraordinary writedown (as opposed to scheduled amortisation). It was not permissible to assimilate the trademarks to acquired goodwill (amortisable in Germany over 15 years for tax purposes), because trademarks were separate and independent assets. Finally, the Court rejected the argument that the trademarks were replaced over time by a new self-created (and therefore non-capitalisable) intangible asset merely because they were modernised in certain respects.
While the ruling appears to be a categorical rejection of the amortisability of trademarks absent special circumstances, e.g. a showing that the trademark is linked to a product which is being discontinued, there are nevertheless good reasons for not taking it at face value.
The underlying case involved an issue of valuation, as opposed to income tax law. It furthermore was decided under the Valuation Act in force through December 1992, not under the new version of the statute which governs tax years from 1993 on. A basic difference between the "old" and the "new" valuation law is that, under the new law (sec. 109 par. 1 BewG), the values in the tax balance sheet are by and large controlling for purposes of the Valuation Act as well, whereas the old valuation law followed principles unique to itself in many more respects. In a short essay written in January of this year, 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 as applicable to tax years after 1992. More importantly, the grounds of the decision, in the authors' view, could never apply for income tax purposes.
In point of fact, for income tax purposes the German tax authorities, at least in certain states, are known sometimes to permit the amortisation of purchased trademarks on the theory that a trademark will go out of style with time and therefore lose its value unless it is periodically updated. Even if updated or modernised, a new non-capitalisable self-created intangible may be the result. It currently appears possible that the German tax authorities in certain states including Hessen may give official or unofficial assurances that the decision here reported on is not to be applied for income tax purposes.
There is thus justification for a sanguine view of the ruling here reported on as a sort of false alarm. Some uneasiness persists, however, because the Federal Tax Court was by no means at pains to include the observations made in this article in the grounds of its decision, which at first glance would certainly seem to have income tax validity.
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