Date:
This article was written by
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Senior Consultant, National Office Tax & Legal
Cross-border market development activities within international corporate groups are frequently financed through intra-group grants. From a tax perspective, such payments regularly raise questions not only regarding their business purpose, arm’s length nature, or shareholder-related motivation, but also regarding their accounting treatment. In two largely identical decisions dated May 20, 2026 (case no. IV R 37/23 and IV R 4/26 (non-published)), the German Federal Fiscal Court (Bundesfinanzhof; BFH) established important principles of practical relevance in this regard.
A German general partnership (Offene Handelsgesellschaft; OHG), as the owner of a globally exploited trademark, earned royalty income from foreign group companies based on their sales revenues. The partnership granted a market development grant to the French parent company for the restructuring and further development of the French business, with the grant to be passed on to the local distribution companies. The recipient of the grant undertook, among other things, to expand distribution activities in France, provide evidence of profitability, and continue the French business for at least 15 years. In the event of premature termination, the grant was to be repaid on a pro rata basis. The OHG documented its expectation of increased royalty income through a profitability analysis and, for the first time in the fiscal year at issue (2004), capitalized the grant as an intangible asset with an amortization period corresponding to the planned continuation of the business. The tax office and the Fiscal Court (Finanzgericht; FG), however, denied tax recognition of the payment and regarded it as a withdrawal motivated by shareholder considerations under Section 4 (1) sentence 2 of the German Income Tax Act (Einkommensteuergesetz; EStG).
The BFH disagreed and classified the market development grant as a business-related expense. The decisive factor is the economic motivation of the paying entity, namely whether the expenses serve the generation of its own income. A direct contractual relationship with the ultimately benefiting distribution companies is not required. According to the BFH, the primary objectives in the case at hand were the long-term development of the French market and the safeguarding and increase of future royalty income. Consequently, the grant payment did not constitute a withdrawal.
The BFH also affirmed the arm’s length nature of the grant. The agreement was supported by a plausible profitability analysis demonstrating that the expected additional royalty income would exceed the amount of the grant. The absence of collateral did not contradict this conclusion, as a non-repayable grant is, by its nature, not associated with a repayment claim. At the same time, the assumption of market development costs was consistent with the functional and risk profile of the OHG as the trademark owner and strategic leader of the corporate group. As licensor, the OHG directly benefited from the successful market development. Accordingly, an adjustment under Section 1 of the German Foreign Tax Act (Außensteuergesetz; AStG) was also not warranted. The BFH therefore confirmed that market development costs may, under certain circumstances, be borne exclusively by the owner of the key intangible assets where the relevant measures predominantly serve that owner’s own economic interests.
From an accounting perspective, the grant payment, as recognized by the OHG, could not be treated as an immediately deductible expense. Rather, through the grant agreement, the OHG acquired a goodwill-like intangible asset in the form of a “market development right” (Markterschließungsrecht). This asset embodies the economically exploitable right to the continuation and expansion of the French business and thus the future earnings potential of the developed market. Since an acquisition for consideration may also exist where the asset itself is created through the underlying legal transaction, such expenditures must be capitalized as acquisition costs and amortized over the contractual useful life (15 years in this case).
Notice:
With its decision, the BFH strengthens the tax recognition of intra-group market development grants where the grantor can demonstrate a genuine business-related interest of its own. Consequently, robust ex ante profitability analyses, careful contractual structuring, and appropriate accounting and transfer pricing documentation become significantly more important in practice.