Deal Costs in M&A: Deductible Expense or Acquisition Cost?

Legal fees, tax advice, financial due diligence, commercial due diligence and other transaction costs can quickly become a significant cost item in an M&A process.

A common assumption is that these costs can simply be deducted as operating expenses by the acquisition vehicle.

That is not necessarily the case.

For an acquisition GmbH acquiring shares in a target company, the tax treatment of transaction costs depends primarily on what the respective costs relate to and how closely they are connected to the specific acquisition.

The key question: What caused the expense?

The timing of an invoice is not decisive on its own.

Instead, the relevant question is whether the expenditure is economically attributable to the acquisition of the shares.

Where transaction costs are directly attributable to the acquisition, they may qualify as incidental acquisition costs (Anschaffungsnebenkosten) of the participation.

This can apply, for example, to certain legal, tax, due diligence or other advisory costs incurred specifically for the acquisition of the target.

In that case, the costs are not immediately deductible as operating expenses. Instead, they increase the acquisition cost of the participation.

Other expenses may be treated differently where they are not sufficiently attributable to the actual acquisition.

The classification therefore requires an analysis of the individual services rather than simply treating every invoice connected with the transaction in the same way.

One important dividing line: the acquisition decision

A particularly relevant question is when the buyer moved from evaluating a potential opportunity to pursuing a specific acquisition.

Costs incurred at a stage where potential targets are still being screened and the acquisition decision remains genuinely open may have to be assessed differently from costs incurred once the buyer has made a fundamental decision to pursue the acquisition of a specific target.

This distinction can be particularly relevant for due diligence, tax structuring and other advisory work.

In practice, this means that the transaction timeline matters.

Relevant questions may include:

• When was the target first identified?
• When did the buyer decide in principle to pursue the specific acquisition?
• When were advisors instructed?
• What exactly were they instructed to analyse or negotiate?
• Did the work still serve to identify or evaluate potential opportunities, or was it already directed at implementing a specific acquisition?

There is therefore not always a single moment at which every transaction cost suddenly receives the same tax treatment.

The underlying activity and its connection to the acquisition remain decisive.

Why this matters

For smaller transactions, the distinction may appear technical.

For larger transactions, it can have a material impact.

If an acquisition vehicle incurs EUR 50,000, EUR 100,000 or EUR 200,000 of advisory costs, the question whether those costs are immediately deductible or must be capitalised can materially affect the company's taxable result.

This is particularly relevant for acquisition vehicles, which often incur substantial transaction costs before generating meaningful operating income of their own.

A tax deduction that is assumed in the transaction model but ultimately turns out to require capitalisation can therefore materially change the expected tax position of the acquisition structure.

One invoice does not necessarily mean one tax treatment

The issue becomes even more practical where one advisor provides several types of services under the same engagement.

A single legal or tax invoice may, for example, cover work relating to:

• the acquisition agreement
• tax due diligence
• acquisition financing
• corporate structuring
• management participation
• general corporate matters

Those services do not necessarily have to receive the same tax treatment.

A meaningful breakdown of the underlying services can therefore become important.

Generic invoice descriptions such as “M&A advisory services” may make the subsequent allocation unnecessarily difficult.

For material transaction costs, the scope of work, engagement documentation and invoice descriptions should therefore allow the individual workstreams to be identified.

Deal cost allocation should start before closing

The tax treatment of transaction costs should not be considered for the first time when the annual financial statements are prepared.

During the transaction, the buyer should already have a clear picture of:

• which transaction costs are being incurred
• which services the respective costs relate to
• at what stage of the transaction they were incurred
• how closely they relate to the acquisition of the specific target
• how the costs should be documented and allocated for tax purposes

This is also relevant where a transaction ultimately does not close.

A failed deal does not automatically mean that every transaction cost can simply be treated as an immediately deductible expense. The underlying purpose and circumstances in which the respective costs were incurred still need to be analysed.

Transaction structuring and tax treatment belong together

Deal costs are often discussed primarily as a budgeting issue:

How much will legal counsel, tax advisors, financial advisors and due diligence providers cost?

But there is a second question that should be addressed at the same time:

What happens to those costs for tax purposes?

For acquisition vehicles in particular, the answer can make a meaningful difference.

The practical takeaway is therefore simple:

Target screening, acquisition decision, transaction execution and closing should not be viewed as one undifferentiated cost block.

The tax treatment of deal costs should be considered alongside the transaction itself — and not only after closing.