• Service: Tax, Mergers & Acquisitions, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 4/2/2013

Germany - Deduction of due-diligence expenses incurred on failed acquisition  

April 2: Germany’s federal tax court (Bundesfinanzhof—BFH) held that due-diligence expenses incurred by a German company with respect to a failed acquisition of a Swiss company are deductible business expenses.

The case identifying information is: I R 72/11


In 2001, a German corporation intended to acquire shares in a Swiss corporation. The German company submitted a purchase offer to the Swiss company which was subject to a due-diligence assessment.

In 2002, the acquisition ultimately failed. The German corporation claimed the due-diligence costs as immediately deductible business expenses.

The German tax authorities, however, denied the deduction, asserting that these costs were properly treated as object-related transfer costs. In other words, because of the acquisition’s failure, these costs were subject to a rule that prohibits the recognition of profit reductions associated with shares.

Federal tax court’s decision

The BFH held that the non-deductibility rule does not apply to this “wasted expenditure” and that the object to which the alleged non-deductibility would relate (shares in the Swiss company) could not be attributed legally or economically to the German company at any point in time.

In the opinion of the court, only an object—and not a transaction—can give rise to the non-deductibility of such expenses, and that such an object (a shareholding) did not exist in the present case because the acquisition failed.

KPMG observation

It has been observed that the court explicitly left unanswered a question whether the expenditure would be considered as an immediately deductible expense or treated as a balance sheet item at the point in time when incurred. Even though the decision was issued under then-effective corporate tax law provisions, the current tax law provisions generally reflect similar rules.

An April 2013 report prepared by the KPMG member firm in Germany: German Tax Monthly (April 2013) includes discussions of:

  • Court of Justice of the European Union on personal costs to be taken into account when crediting foreign withholding tax against German income tax
  • BMF guidance regarding future tax audits of large businesses
  • A lower court decision on the real estate transfer tax incurred on the acquisition of a partnership interest, deductible as a business expense
  • A “loss of identity” of the business partner in a merger of a GmbH holding an interest in a “GmbH & atypisch still” with the partnership (i.e., the silent partner)
  • Update on legislation concerning a directive on tax administrative cooperation

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