Writing off goodwill – what is it and how does it work?

Goodwill is the value paid above the book value when acquiring a company — for brand name, customer base, know-how, and commercial position. Commercial depreciation is permitted over 5–10 years; for tax purposes, it must be taken up to a minimum of 10 years (Art. 3.30 Income Tax Act / Art. 8 Corporate Income Tax Act). An important difference: commercial depreciation (financial statements) and tax depreciation (corporate income tax return) can diverge, leading to deferred tax liabilities. Below: calculation, depreciation periods, and how Karim's acquisition of a software agency is handled from a tax perspective.

The short answer

• What: value paid above book value at acquisition — appears on the balance sheet as an intangible asset.
• Commercial: depreciation over 5-10 years (Book 2 of the Dutch Civil Code, RJ guidelines).
• Tax: at least 10 years (Art. 3.30 Income Tax Act / Art. 8 Corporate Income Tax Act).
• Calculation: purchase price minus book value of assets minus liabilities = goodwill.
• Impact: reduces taxable profit annually → less corporate income tax to pay.

What is goodwill?

In an acquisition, you often pay more than the book value of the acquired company. The difference is goodwill — representing:

• Customer base (value of loyal customers).
• Brand name and reputation.
• Know-how and business processes.
• Staff and culture.
• Market position and exclusivity.

Goodwill is capitalized on the buyer's balance sheet under “intangible fixed assets” and amortized annually over its useful life.

Calculate goodwill

Formula:

Goodwill = purchase price – fair value of assets + fair value of liabilities

Example: Karim's holding company buys a software agency for €1,000,000:

• Fair value of assets (computers, receivables, developed software): € 400,000.
• Fair value of liabilities (debts, provisions for debtors): €100,000.
• Net assets: € 300,000.
• Goodwill: €1,000,000 – €300,000 = €700,000.

That €700,000 is capitalized and depreciated over 10+ years.

Commercial vs. fiscal depreciation

Commercial

According to the Guidelines for Annual Reporting (RJ 121), depreciate over the expected useful life — usually 5-10 years (rarely longer). Reduce the book value on the balance sheet annually.

Tax

At least 10 years (Art. 3.30 Income Tax Act, also applicable via Art. 8 Corporate Income Tax Act). May be longer; in practice, 10 years is usually chosen — fastest deductibility.

Calculation: € 700,000 ÷ 10 years = € 70,000 per year tax-depreciation. At a corporate tax rate of 25.8% = € 18,060 tax saving per year.

Difference → deferred tax

With commercial depreciation over 5 years and fiscal depreciation over 10: lower commercial profit than taxable profit in the first 5 years → temporarily higher corporate income tax assessment than the financial statements suggest. This is recognized as an “active deferred tax asset” on the balance sheet.

Impairment test

In addition to annual depreciation: in the event of indications of a decline in value (e.g., loss of key customers, market crisis), an impairment test must be performed. If fair value is lower than book value: exceptional depreciation — a large one-off amount.

Tax: special depreciation is permitted under certain conditions in the corporate income tax return (write-down). Requires objective indication and sound substantiation.

Goodwill in asset deal vs. share deal

Upon acquisition, two routes:

• Asset deal: buyer purchases assets and liabilities separately — goodwill is explicitly determined and amortized.
• Share deal: buyer purchases shares — goodwill remains implicitly included in the share value. No depreciation is possible for the buyer (share value is not written off).

For the buyer, an asset deal is often more tax-efficient — the depreciation of goodwill reduces taxable profit for years. The seller may consider an asset deal more expensive (potential corporate income tax on capital gains, no participation exemption). Negotiation regarding the deal structure is essential.

Honest recommendation

Goodwill is no academic exercise — in SME acquisitions often ranges from €100,000 to millions of euros. For asset deal vs. share deal negotiations, consult a tax specialist who understands both perspectives. For an asset deal: careful pricing per asset (machinery, software, customer base) to optimize depreciation over various periods. For a share deal seller: the participation exemption often protects against corporate income tax on capital gains — have the tax impact calculated in advance.

For other topics: participation exemption, corporate income tax return and share transfer.

Frequently Asked Questions