WHEN IS A VALUATION OF LONG TERM ASSETS NECESSARY FOR TAX PURPOSES?
WHEN THE “NEUTRAL THIRD PARTY” IS MISSING
When you sell a machine to another company, things are usually simple: the valuation of the fixed assets – i.e. the machine – is based on the buyer’s willingness to pay.
The buyer, (i.e. the third party – as the saying goes) pays you a purchase price that usually corresponds to the market value. The market value is generally assumed to be objective, because with the third party – i.e. our buyer – we have an independent authority that confirms the value with your purchase or the purchase price.
So if tax-relevant transactions are triggered with the sale (because you have made a profit, for example), the tax office simply falls back on the purchase price.
It becomes difficult when machinery and business assets are transferred without the involvement of a third party who objectifies the valuation of the fixed assets, so to speak (for example, through his willingness to pay). This happens when
- the assets are transferred free of charge (e.g. in the case of gifts or inheritance)
- when a purchase price is paid but the transaction takes place internally. For example, if you transfer something from private assets to business assets (or vice versa) or sell machines abroad within the group.
In these cases, the market value must be determined differently.
It is not uncommon for the tax office to do its own assessment and make a valuation of the transferred fixed assets. However, this does not necessarily have to correspond with your assessment and may well lead to an excessively high assessment basis for the tax.
This is where we come in and carry out an objective and neutral valuation of fixed assets. As independent and certified experts, our valuations are recognised by the tax authorities.
INHERITANCE TAX: WHEN THERE ARE DIFFERENT VIEWS ON THE FAIR MARKET VALUE
The fair market value can be quite unfair:
It plays a crucial role in determining inheritance tax. By definition, it is the price that would ordinarily be obtained in a sale of the asset, excluding only unusual or personal circumstances.
In the case of movable depreciable fixed assets, an appropriate residual value of at least 30 per cent of the acquisition or production costs can be applied for reasons of simplification, provided this does not lead to incorrect results (R B 11.3 para. 7).
In practice, these regulations already give rise to the following potential for dispute:
- Are value-influencing circumstances of an unusual or personal nature and must therefore be left out?
- Or are there rather objective, value-reducing circumstances that lead to a lower valuation and thus lower taxation?
- The application of the 30 per cent rule can lead to incorrect results from the point of view of the tax office if, for example, the book value is significantly higher. However, this does not necessarily mean that the book value is closer to the truth.
- On the other hand, the 30 percent rule can also lead to inflated values.
In such and similar cases, we determine the fair market values and prepare court-approved expert opinions that provide clarity for all sides.
Please note that our little tax excursion does not constitute tax advice. For that, ask your trusted tax advisors. We, on the other hand, would like to convey to you when a “tax-proof” valuation of fixed assets by us could be useful for you. Therefore, the tax advisors among the visitors to our website may forgive us for the highly simplified presentation.
VALUATION OF FIXED ASSETS IN THE CONTEXT OF TAX DUE DILIGENCE
Transactions in the corporate sector such as mergers, company sales and acquisitions, takeovers and the like (often collectively referred to as M&A) are usually accompanied by careful checks and risk analyses – the so-called due diligence.
Especially in the case of asset deals (i.e. the sale of individual assets), the individual valuation of the machinery plays a central role in the context of tax due diligence. The asset deal enables the buyer to make a so-called “step up”. Here the machines are revalued at their current market values, whereby hidden reserves are raised and a write-up is made to the original book values. This often results in a significantly increased depreciation potential.
In our article on the “Valuation of assets in asset deals” you will learn more about the consequences and structuring options.
VALUATION OF FIXED ASSETS FOR THE OPENING BALANCE SHEET
Opening balance sheets are needed not only in connection with the formation of new companies but also in the case of mergers, conversions and changes of legal form. If the assets are newly acquired, the determination of the opening balance sheet values is usually problem-free, since the acquisition costs are known.
It becomes more difficult when existing fixed assets are brought into the new or merged or converted company and must be valued accordingly – including any incidental acquisition costs such as assembly or transport. Special valuation requirements may also arise from different regulations of HGB, IFRS or US-GAAP.
Here, too, your tax advisor knows which values and valuations are to be made and we take over the correct and recognised determination of the same.
AT A GLANCE: VALUATION OF INVESTMENT ASSETS “FOR TAX”.
- In connection with gratuitous transactions such as inheritance or donation
- For transactions without an objective third party, such as intra-group transactions, contributions to business assets or withdrawals
- For due diligence in context with M&A
- For the evaluation of assets within the scope of the purchase price allocation in the asset deal
- For the preparation of opening balance sheets