When you buy a business as an asset deal, you acquire individual assets and liabilities, and the difference between the purchase price and the value of the net assets acquired is goodwill. Slovakia and the Czech Republic treat this goodwill very differently for tax: Slovakia spreads it over at most seven years, while the Czech Republic spreads it evenly over 180 months, that is fifteen years. This article looks at the transaction through the buyer’s eyes in both countries.
What is the difference between an asset deal and a share deal?
A business can be bought in two fundamentally different ways. In a share deal you buy the equity stake and take the company on with its history and liabilities; for the buyer, nothing is usually depreciated. In an asset deal you buy the set of assets and liabilities that make up the business, while the seller remains the legal entity. Goodwill and the depreciation of acquired assets only arise in the asset deal.
Because the tax consequences differ so much, the choice between the two structures is one of the first decisions in any acquisition. We compare both forms from the seller’s side in our overview of the share deal versus asset deal in Slovakia and the Czech Republic; here we focus on the buyer.
How is goodwill created on the purchase of a business?
Goodwill is the positive difference between the purchase price of the business and the fair value of the net assets acquired – that is, the assets less the liabilities taken over. It reflects value not tied to any individual tangible asset, such as reputation, an established customer base or working processes.
Example: you buy a business for 500,000, the fair value of its assets is 700,000 and the liabilities taken over are 300,000. The net asset value is 400,000, so positive goodwill of 100,000 arises. If you paid only 350,000 for the same business, negative goodwill would arise instead. The concept is the same in Slovakia and the Czech Republic; what differs is the tax treatment that follows.
How is goodwill taxed for the buyer in Slovakia?
In Slovakia the tax treatment is set out in Section 17a of Act No. 595/2003 Coll. Positive goodwill is included in the tax base over at most seven consecutive tax periods, at a minimum of one seventh per year, starting in the period in which the business sale contract took effect. Positive goodwill acts as an expense that reduces the tax base.
Because the law sets only a minimum pace of one seventh per year and a maximum of seven years, the buyer may include more than one seventh in a given year and claim the expense faster. Negative goodwill is handled symmetrically over the same period but increases the tax base, since it reflects a bargain purchase from the buyer’s point of view.
How is goodwill taxed for the buyer in Czechia?
In the Czech Republic the rules are in Section 23(15) of Act No. 586/1992 Coll. A Czech buyer records either goodwill (if the assets are individually revalued to fair value) or a valuation difference to the acquired assets (if they are not). Both positive amounts are included in tax-deductible costs evenly over 180 months, that is fifteen years; the negative amounts increase the profit over the same period.
So the headline contrast is the period: Slovakia spreads goodwill over up to seven years with a one-seventh minimum, whereas Czechia mandates an even fifteen-year spread. A positive Czech goodwill of 1,800,000 therefore enters costs at 10,000 per month, or 120,000 per full year, with no option to accelerate it the way Slovak law allows.
How do accounting and tax rules diverge in Czechia?
A further Czech specific is that accounting and tax treatment of goodwill diverge. For accounting purposes goodwill is usually amortised within 60 months, and for positive goodwill the period may be extended, but to no more than 120 months. For tax purposes, however, the uniform period is 180 months. The two layers therefore drift apart and must be tracked separately.
The Czech valuation difference to acquired assets is simpler: it is amortised over 180 months for both accounting and tax, so the two align. Slovakia does not use this parallel accounting-versus-tax split in the same way; there the seven-year inclusion under Section 17a is the reference point.
How are the acquired tangible and intangible assets depreciated?
Alongside goodwill, the buyer also depreciates the acquired assets themselves. In both countries individual assets are placed in the relevant depreciation group and depreciated under the standard rules of the income tax act. In Slovakia the assets are measured at fair value; in Czechia this depends on whether the goodwill or the valuation-difference route was chosen.
Goodwill and the depreciation of individual assets thus run as separate lines with different periods. That has to be factored into planning the overall tax impact of the purchase, because the differing periods shape the tax base for several years to come.
What should a buyer watch out for?
Buying a business is a transaction whose tax consequences are set in its very structure. Before signing, it pays to check the state of the assets, liabilities and tax history – this is what due diligence is for, revealing hidden risks and helping to set the purchase price and the valuation correctly.
It is equally worth calculating in advance how goodwill and depreciation will feed into the tax base in the coming years. On larger deals the impact runs into tens or hundreds of thousands per year, so the asset valuation and tax assessment should be part of preparing the purchase, not an afterthought once it has closed.
Planning to buy a business and want to know in advance how goodwill and depreciation will affect your tax in Slovakia or Czechia? Let us walk through the tax side of the deal with you.
FAQ
How long is goodwill written off for tax in Slovakia and Czechia?
In Slovakia goodwill is included in the tax base over at most seven consecutive tax periods, at a minimum of one seventh per year, under Section 17a of Act No. 595/2003 Coll. In the Czech Republic goodwill (and the valuation difference to acquired assets) is included in costs evenly over 180 months, that is fifteen years, under Section 23(15) of Act No. 586/1992 Coll. The Slovak buyer may accelerate the claim; the Czech period is fixed.
Does positive goodwill reduce the tax base?
Yes. Positive goodwill arises when the purchase price exceeds the fair value of the net assets acquired and acts as an expense that reduces the tax base. Negative goodwill arises on a bargain purchase and increases the tax base. This logic is the same in Slovakia and the Czech Republic; only the period over which the amount is spread differs.
Do accounting and tax treatment of goodwill differ?
In the Czech Republic they do. Goodwill is amortised within 60 months for accounting (extendable to at most 120 months for positive goodwill), but over a uniform 180 months for tax. The Czech valuation difference to acquired assets is 180 months for both. Slovakia instead works from the seven-year inclusion in the tax base under Section 17a, so the two systems are structured differently.