Local tax court of Cologne rules on qualification of due diligence costs as acquisition costs

The local tax court of Cologne (case reference: 13 K 4188/07) ruled on 6 October 2010 that due diligence costs incurred in connection with the acquisition of shares in a company’s capital qualify as acquisition costs that must be capitalized rather than immediately deducted for tax purposes.

In the case, a German stock corporation treated due diligence and other advisory fees it incurred in connection with the acquisition of three nonresident corporations as (immediately) tax-deductible expenses. The local tax court rejected the taxpayer’s treatment of the expenses, concluding that it can be assumed that at the time a letter of intent has been signed and an advisor is engaged to carry out the due diligence, a general decision to acquire the company has already been made. The court also held that a prudent business manager would not engage advisors for a (costly) due diligence before he had decided to buy the company. Further, a target company would not be willing to grant such extensive access to its internal data without having agreed with the acquirer on a common objective (e.g. the acquisition or a merger).

The local tax court’s decision is in line with the jurisprudence of the Federal Tax Court (BFH), which has ruled that expenses incurred for professional opinions in connection with the acquisition of shares in a GmbH qualify as acquisition costs provided the costs are incurred after the general (but not necessarily final) decision to acquire the company has been made.

It is not yet clear whether the taxpayer will appeal the decision.

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.