Is a goodwill payment taxable?

Is a goodwill payment taxable?

Sale of goodwill legal requirements

Goodwill is defined as the capacity to generate profits thanks to intangible assets that can generate future profits, such as: the value of the brand, the customer portfolio, its positioning, the know-how or the value of patents.

In addition to goodwill, there are other assets and liabilities that can lead to the market value being very different from the book value. For example, those accounted for at amortized cost. Thus, if we analyze a bank’s balance sheet, items such as loans and receivables, deposits and issues would be valued in this way. Other assets (real estate or inventories) are also valued at historical cost.

At the time of acquisition, all the assets, liabilities and intangibles of the entity must be valued at fair value. Once this exercise has been carried out, the price paid is compared with this equity adjusted to fair value and the difference would be justified by the capacity to generate positive (‘goodwill’) or negative (‘badwill’) cash flows in the future.

Goodwill transfer case study

a. The sum of the simple monthly average balances of the daily balances of the funds available in foreign entities, domiciled or not in Ecuador, expressed in monetary units or units of account; and,

b. The sum of the simple monthly average balances of the daily balances of investments issued by issuers domiciled outside the national territory, expressed in monetary or account units.

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c.    When the collection of funds or investments held or made through subsidiaries located in tax havens or preferential tax regimes or through affiliates or offices abroad of the taxpayer, the taxable base of the tax to which the monthly rate of 0, 35% foreseen in the Law, shall be determined by deducting from the total assets of the referred subsidiaries, affiliates or offices abroad, the result of the sum of the total equity of these plus the total of their liabilities, without considering the deposits (savings accounts, current accounts, time deposits, etc.) corresponding to individuals and resident companies. ) corresponding to individuals and companies resident or domiciled in Ecuador.

What is goodwill?

The continuous changes in the accounting and tax treatment of goodwill can create doubts for companies immersed in this issue, therefore we will clarify some very important points.

Amortization maximum 2% without special requirements for new acquisitions (temporary exception for the period 2015 to the general rule of 5%), without accounting registration principle and non-deductibility of impairment.

Under two special requirements, and endowment of the accounting reserve, depreciation maximum 1% (temporary exception for the period 2014 to the general rule of 5%), no principle of accounting registration, and deductibility of impairment.

No special requirements for those acquired in that period, maximum 1% (temporary exception for the period 2015 to the general rule of 5%), no accounting entry principle, no allocation to the special reserve, and no deductibility of impairment.

No special requirements for those acquired in tax periods beginning after 1/1/2015, maximum 5%, with accounting registration principle, no allocation to the special reserve, and non-deductibility of impairment.

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It is advisable to buy goodwill

Regarding the first point, the Dgaf concluded that the FCPs are not taxpayers of the ICA because article 54 of law 1430 of 2010 (modified by article 177 of law 1607 of 2012) made a restrictive classification of the taxpayers of departmental and territorial taxes within which it is not possible to fit an investment vehicle such as a FCP.

Regarding the second point, the Dgaf concluded that the activity of those who make the investments in the FCPs does constitute an activity susceptible to be taxed with the ICA, whose taxable base is composed of “the totality of the income obtained in their capacity as investors (…) registered according to the tax rules of the tax authorities. ) recorded in accordance with the tax and accounting rules applicable to them”, which must be distributed to the investor “in the same title that they have received them in the fund and under the same tax conditions that they would have if they were received directly by the subscriber or participant”, and that -in light of the provisions of Article 343, paragraph 2 literal d) of Law 1819 of 2016- such income shall be understood taxed in the municipality where the headquarters of the company where the investments are held is located.

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