How is goodwill taxed?
It is important to understand the concept of goodwill and its proper accounting, as it can have a significant impact on a company’s financial statements.
Goodwill should be evaluated periodically to ensure that its carrying value does not exceed its recoverable amount.
Proper management and accounting for goodwill is crucial to accurately reflect the company’s financial position and to make informed decisions.
Practitioners should be familiar with the accounting principles applicable to this intangible asset.
Goodwill is an intangible asset and under certain conditions may be subject to amortisation. However, there are differences between accounting and tax…
Goodwill: What is it?
Goodwill is a set of intangibles (clientele, trade name, market share, human capital, know-how, etc.) which implies an increased value of a business but which cannot be imputed separately from other elements and therefore cannot be transferred in isolation.
Goodwill is an intangible asset of great value for companies, as it represents much more than mere tangible assets.
It reflects the value added by a company through its intangibles, such as its reputation, established brand and loyal customer base.
These immaterial, but hugely valuable, aspects are what actually drive the organisation’s long-term success and profitability.
Goodwill is therefore a key indicator of a company’s positioning and strength in the marketplace.
Far from being a simple accounting record, this intangible asset is the representation of the goodwill that the company has managed to build through years of hard work, innovation and commitment to its stakeholders.
To ignore or underestimate the value of goodwill would be to overlook one of the main assets that determine the true worth of an organisation in today’s era.
Goodwill in accounting
While all companies have goodwill, it is an intangible asset and can only be recognised if it is acquired for consideration from third parties and results from the purchase of a business.
Calculation of goodwill
Its value is determined by the difference between the price paid for the purchase of a business and the total value of the assets acquired less the value of the liabilities assumed. This difference is the value of the goodwill to be recognised.
Accounting amortisation of goodwill
Since 2016, according to accounting standards and in the absence of evidence to the contrary, goodwill is presumed to have a useful life of ten years (and should therefore be amortised at a rate of 10% per annum).
Tax treatment of goodwill
Extra-accounting adjustments
Corporate Income Tax (CIT) regulations, however, stipulate that goodwill and assets with an unreliable useful life (e.g. a trademark or a patent with no expiry date) can only be depreciated for tax purposes up to a limit of one twentieth of their amount (i.e. according to a depreciation rate of 5% per annum).
As a result of these differences, the company will have to make off-balance-sheet adjustments to its income tax every year.
Goodwill..: Example of calculation
On 1 April 2024 a company acquires a set of assets and liabilities that constitute a branch of activity for 150,000 euros, although their book value amounts to 50,000 euros (the difference of 100,000 euros is the value of the goodwill).
The adjustments to be computed in the IS will be as follows:
| Exercises | Amortization cont. 10% | Amortizaciónfiscal 5% | Ajusteen el IS |
| 2024 | 7.500 (1) | 3.750 (1) | 3.750 |
| 2025 a 2033 | 90.000 | 45.000 | 45.000 |
| 2034 | 2.500 | 5.000 | -2.500 (2) |
| 2035 a 2043 | – | 45.000 | -45.000 |
| 2044 | – | 1.250 (3) | -1.250 |
| Total | 100.000 | 100.000 | 0 |
In 2024, the goodwill is amortised from 1 April, so the accounting amortisation is 7,500 (100,000 x 10% x 9/12) and the tax amortisation is 3,750 (100,000 x 5% x 9/12).
From 2034 the accounting depreciation ends, so the adjustments start to be negative.
In 2044, the goodwill is only amortised for tax purposes in the first quarter, as it is considered fully amortised for tax purposes on 31 March 2044.
Goodwill in small companies
Depreciation as tangible fixed assets
If you are a small company, you can depreciate any new assets you acquire on an accelerated basis.
Thus, in the case of tangible fixed assets and investment property, you can depreciate them by multiplying the maximum coefficient of the official depreciation tables by two.
It is an Intangible
Well, if your company acquires intangible assets, such as goodwill, you can also benefit from this incentive. However, the way in which the incentive is applied varies:
If the intangible assets are listed in the official tables, you can also deduct double the maximum coefficient of the tables.
Other assets: If they do not appear in the tables (as is the case with goodwill and most intangible assets), 1.5 times the applicable depreciation may be deducted. Thus, the tax amortisation of goodwill in the case of small companies can be 7.5%.
Summary table of amortisation of intangible assets
| Amortizacion | Generalcase Reduced dimension | |
| Intangibles tablas (1) | 33% | 66% (x 2) |
| Reliable service life (2) | s/ vida útil | x 1,5 |
| Unreliable lifespan (3) | 10% | 15% (x 1,5) |
| Goodwill | 5% | 7,5% (x 1,5) |
The intangibles shown in tables are computer systems and software, cinematographic and phonographic productions, and video and audio-visual series.
This would be the case of transfer rights or an administrative concession that expires within a certain period of time, for example.
A trademark or a patent without an end date, for example.
Business restructuring
Corporate restructuring operations (mergers, spin-offs, non-monetary contributions of branches of activity, etc.) are transactions carried out for consideration.
When these operations are carried out, goodwill may arise in the accounts of the acquiring entity.
Specifically, goodwill can arise in two ways:
- Existing goodwill.This would be the case where the goodwill is already part of the assets of the transferring entity before the restructuring.
In these cases the transferring entity was already amortising the goodwill, as it had it in its accounts. Therefore, the acquiring entity can continue to amortise it.
- Goodwill generated . This would be the case where the goodwill has been generated over time in the transferring entity and does not appear in its assets at the time of the transfer.
However, as its value will have been taken into account in determining the amount of the assets transferred, the acquirer must account for the difference between the acquisition cost and the value of the assets and liabilities transferred.
Improper merger
Most common case
Although the treatment of goodwill may have particularities depending on the restructuring operation carried out, the most common case will be that of the so-called “improper mergers”. In this type of operation, a company absorbs another company in which it already holds all the shares.
Accounting treatment
For accounting purposes, the acquiring company (the acquiring company) must derecognise the holding in the subsidiary and replace it with the assets and liabilities of the latter, which will be included in its balance sheet in accordance with the rules for the preparation of consolidated financial statements. Specifically:
The assets and liabilities must be recorded on the balance sheet at fair value (market value).
The difference between the book value of the shares being written off and this fair value must be recorded as goodwill (if positive), in which case it may be amortised for accounting purposes at a rate of 10% per annum.
Taxation of goodwill
In these cases, the tax deductibility of goodwill will depend on whether or not the transaction has been carried out under the special restructuring (or “tax-neutral”) regime:
- Waiver of the scheme . If the acquiring company has waived this special scheme, since the goodwill is generated by a transfer for valuable consideration (merger, spin-off, etc.), it may deduct for tax purposes the accounting amortisation of the goodwill up to a maximum annual limit of 5%.
- The scheme applies. If the company avails itself of this regime (which is applied by default), the tax valuation of the assets and rights acquired is the same as the valuation they had in the transferring entity prior to the transaction. Therefore, even if the goodwill has been accounted for, its amortisation is not deductible (in these cases the tax value of the goodwill is zero).
At present, goodwill is amortisable for accounting purposes at 10% and for tax purposes at 5%, so it is necessary to make tax adjustments in the income tax for each year to reflect the difference in the amortisation periods.
