The marketable part of the right to a name as an economic good
A name is no longer merely an expression of personal identity, but rather also an economically exploitable good. Celebrities and social media influencers have shown us how this is done. Own names are used selectively to build, market and license a brand. Businesses are increasingly acknowledging this advertising value and are using it in their marketing campaigns, for example, through exclusive cooperations. In terms of tax, the question that arises is essentially: does a name constitute an economic good? It is only if this is the case that certain tax consequences may also be expected.
1. Criteria for tax treatment as an economic good
Economic goods can be contributed to business assets, depreciated or amortised, withdrawn or relocated abroad (‘taxable disjunction’). It is therefore necessary to divide up the right to the name into the part that is bound up with the physical person - and is thus irrelevant for tax purposes - as well as into that which is separate from the person - therefore a delimitable and thus independently exploitable part. The Federal Fiscal Court (Bundesfinanzhof, BFH) did this in a high-profile ruling of 12.6.2019 (case reference: X R 20/17, German Federal Tax Gazette [Bundessteuerblatt, BStBl.] II 2020 p. 3) and, in this respect, coined the term (in German) “marketable part of a right to a name” (“kommerzialisierbaren Teils des Namensrechts“).
The tax implications, first of all, relate to the classification under civil law. In civil law it is generally recognised that the right to personality in general is worth protecting and that, in particular, the right to one’s own image and to one’s own name should be safeguarded. Furthermore, both of these can also be economically exploited. Under civil law, it is not solely non-monetary interests (e.g., a ‘good reputation’) that are protected, but explicitly likewise commercial interests linked to the right to personality (the so-called ‘economic right to personality’). The BFH also adopts this view for tax law and, interestingly, it initially expressly disregarded the fact that, under civil law, it has still not been clarified whether or not a person’s rights to a name can be transferred as a whole to another person.
However, it is solely transferable rights that may be regarded as an economic good; this is because they alone are sufficiently distinguishable and, as such, can thus be decoupled from a natural person and constitute a standalone economic good for tax purposes. The BFH has admittedly not established this for all rights relating to names and images, but just for the “marketable part of the right to a name” that is above and beyond the non-monetary part. Legal practice has found ways here to transfer this part of the right to a name to third parties for consideration and thus to exploit it economically.
2. Distinction from other assets
In practice, these guidelines from the BFH led to inflated expectations in some cases. If economic goods are contributed to taxable business assets, then these can be subsequently depreciated or amortised and will thus reduce the tax burden - and, consequently, almost everybody who was using their name to generate even just a modest amount of advertising revenues intended to contribute the marketable part of their right to a name to their business assets, if any. As a result, Influencers in particular were showered with tax advice. However, the marketable part of the right to a name has to be delimited from other factors that are likewise relevant for the success of advertising services and, in particular, the reach. A marketable part will thus, notably, arise where the advertiser “uses their name” to advertise a product and it is not simply just the reach that is used. It is thus much more likely that this would be so for well-known public figures for whom advertising is merely a ‘spin-off product’, such as in the case of sportspersons, musicians, actors, authors or politicians. At any rate, it would be less likely so for figures who originally became known as influencers because their success would normally be attributed, to a large extent, to their reach. That is why, in the influencer ‘industry’ the BFH ruling rather unjustifiably led to expectations that were too high.
3. Valuation of an economic good based on the right to a name
Naturally, the question of the existence of a marketable part of the right to a name is, in principle, closely linked to its valuation in terms of the amount. In theory, these aspects would need to be strictly assessed one after the other; in practice, particularly in cases where the existence of the respective economic good is already disputed, a lower value would need to be attributed - even if there was agreement concerning the existence - because it is likely that the factors driving the value would have to be assigned to other circumstances (e.g., precisely the reach).
If general tax regulations are followed, then a contribution from private assets into business assets should be measured at its fair market value (Section 6(1) no.6 in conjunction with no. 5 sentence 1 of the Income Tax Act [Einkommenssteuergesetz, EStG]). The fair market value is the amount that a purchaser of the entire business would, within the scope of the total purchase price, apply for the individual economic good assuming the business will continue to operate (Section 6(1) no. 1 sentence 3 EStG). These abstract tax principles lead to considerable practical difficulties for anything that is not usually traded multiple times on the market (such as, e.g., cars), especially when these economic goods are also intangible. For business purposes the valuation is always carried out by discounting the future cash flows. Yet, this statement is likewise too abstract because, in practice, there will of course regularly be a debate about which cash flows could be specifically attributed to the marketable part of a right to a name. Wirtschaftsprüfer [German public auditors] also have principles for this purpose (see Standard 5 issued by the Institute of Public Auditors in Germany [Institut der Wirtschaftsprüfer, IDW]) as well as methods (e.g., the so-called relief from royalty method); naturally however this determination of value will always remain prone to controversy.
4. Contribution of the economic good
The transfer of economic goods to business assets is carried out pursuant to Section 4(1) sentence 8 EStG. This will be the case irrespective of whether the gain is determined in accordance with Section 4(1), Section 5 EStG or in accordance with Section 4(3) EStG. The prohibition on the recognition of intangible assets that were acquired for no consideration, which is specified in Section 5(2) EStG, does not preclude the application of the valuation rule under Section 6(1) no. 5 EStG when a self-developed intangible economic good is transferred to business assets. However, in order to contribute an economic good it has to have been constituted in taxable private assets, therefore, either completely outside of the employment sphere or within the scope of income from employment. Although if a business asset had existed right from the start, for example, as part of a business enterprise, or within the scope of an independent activity, then a ‘contribution’ would not be possible because the economic good would be directly created in business assets and, consequently, would then fall under the prohibition on recognition in Section 5(2) EStG.
5. Residence abroad (taxable disjunction)
A more interesting aspect is the so-called taxable disjunction and it clearly demonstrates that the issue of “the marketable part of a right to a name” harbours not just opportunities, but also risks. In the case of the above-mentioned occupational groups, a move abroad is not uncommon for professional reasons (sportspersons, actors, ex-politicians), or else allegedly for tax reasons (influencers). However, in both cases the following would apply, namely, if business assets exist that include the economic good “the marketable part of the right to a name”, and if a move abroad occurs and the (German) domestic permanent establishment is closed down then, according to Section 16(3a) EStG, this would give rise to a notional cessation of business and the realisation of the hidden reserves, thus a notional sale of the entire business enterprise for tax purposes. In such a case, the realisation of the hidden reserves in the marketable part of the right to a name would occur if this part had not been deliberately contributed or amortised and even if the marketable part of the right to a name had initially been constituted in business assets.
6. Recommendation: Consultation prior to relocating
Taxpayers who personally advertise should always check if a marketable part of the right to a name exists and, if necessary, how it needs to be measured. Taxpayers who want to reduce their tax burdens via a contribution will probably be able to find their way to their tax consultants on their own. Going to see a consultant would however be particularly advisable for those who are planning to move away from Germany. The tax consequences of relocating need to be ‘structured away’. Going so see a consultant would be especially worthwhile for taxpayers who are about to constitute their “marketable part of the right to a name” in their private assets (for example, ambitious sports professionals with future advertising value). By shifting assets abroad at an early stage, first of all, tax advantages would be created, but also the subsequent relocation abroad would become much easier.
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