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This article was written by
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Senior Consultant, National Office Tax & Legal
Multinational groups often use intragroup grants to fund cross-border market development. These payments can raise questions about business purpose, arm’s length terms, shareholder motivation and accounting treatment. In two substantially identical decisions dated 20 May 2026, Germany’s Federal Fiscal Court (BFH) set out principles with important practical consequences. The court considered whether the grants served the grantor’s own business interests and, if so, whether the related expenditure was immediately deductible or required capitalization. It held that a cross-border intragroup market development grants may constitute a business expense when the grantor can demonstrate a genuine economic interest in generating its own income. This article focuses on one of the cases, which is sufficient to illustrate the relevant issues.
A German general partnership (OHG) owned a trademark used worldwide and received sales-based royalties from foreign group companies. The OHG provided funds to its French parent to restructure and expand the French business, with the funds to be passed on to local distribution companies. The recipient agreed, among other obligations, to expand distribution activities in France, achieve profitability and continue operating the French business for at least 15 years. If operations ended early, the grant would be repaid on a pro rata basis. A profitability analysis supported the OHG’s expectation of higher royalty income. For the first time in the fiscal year at issue (2004), the OHG capitalized the grant as an intangible asset and amortized it over the planned 15-year continuation period. The tax office and the Fiscal Court denied tax recognition, treating the payment as a shareholder-motivated withdrawal under Section 4(1), sentence 2, of the German Income Tax Act.
The BFH disagreed and classified the market development grant as a business-related expenditure. The decisive consideration was the paying entity’s economic motivation — specifically, whether the expenditure was intended to generate its own income. The OHG did not need a direct contractual relationship with the distribution companies that ultimately benefited. The BFH found that the grant primarily sought to develop the French market over the long term and increase the OHG’s future royalty income. The payment therefore was not a withdrawal.
The BFH also held that the grant satisfied the arm’s length standard. A credible profitability analysis showed that expected incremental royalties would exceed the grant amount. The lack of collateral did not alter this conclusion because a nonrepayable grant does not inherently create a repayment claim. The OHG’s assumption of the market development costs also aligned with its functions and risks as the trademark owner and the group’s strategic leader. As licensor, OHG stood to benefit directly from successful market development. An adjustment under Section 1 of the Foreign Tax Act was therefore unwarranted. The decision confirms that, in appropriate circumstances, the owner of key intangibles may bear all market development costs when the measures primarily advance its economic interests.
For accounting purposes, however, the grant was not immediately deductible. The BFH held that the agreement gave the OHG a goodwill-like intangible asset, a “market development right.” This asset represented an economically exploitable right to the continued expansion of the French business and the future earnings potential of the developed market. An asset may be acquired for consideration even when the underlying legal transaction creates the asset. The grant therefore had to be capitalized as an acquisition cost and amortized over its 15-year contractual useful life.
BDO Perspective
The BFH decisions support the recognition of intragroup market development grants when the grantor can substantiate its own genuine business interest. Taxpayers should document such arrangements with robust ex ante profitability analyses, carefully drafted agreements, and consistent accounting and transfer pricing records. They should also determine whether the arrangement creates an intangible asset that must be capitalized and amortized rather than deducted immediately.