Intragroup transfer of goodwill
A parent company P has two subsidiaries – A, which was acquired some years ago and B, which was acquired during the period ended 31 December 2010 at a cost of €10 million. For the purposes of this discussion, it is assumed that B had negligible identifiable assets and liabilities. Accordingly, P recorded goodwill of €10 million in its consolidated financial statements.
During 2013, B sells its business to A for its then current fair value of €12.5 million. As the goodwill inherent in B’s business was internally generated, it was not recognised in the financial statements of B. Hence, the entire consideration of €12.5 million represents a profit to B, which is subject to current tax at 20% (i.e. €2.5 million). However, as a result of this transaction, A will be entitled to claim tax deductions (again at 20%) for its newly-acquired goodwill of €12.5 million. The deductions will be received in ten equal annual instalments from 2014 to 2023. For the purposes of this discussion, it is assumed that A will have sufficient suitable taxable profits to be able to recover these deductions in full.
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