Deducting the Expenses for an Internet Address

When starting or running a business, not only the physical but also the internet address can play a crucial role. Can you deduct the costs for purchasing a domain from a person or company already using the name? The BFH made a final decision between the tax office and the tax payer (October 19, 2006 III R 6/05, published on February 14, 2007).

A short explanation on "internet addresses": Domains are not physical but logical or technical addresses in the internet. German address ".de" are governed by the Denic (Domain Verwaltungs- und Betriebsgesellschaft eG). International domains like"*.com / *.net / *.org /*.info" are controlled by the Internic.  All addresses are only allocated once. In case that somebody has already booked the desired name, some companies wish to purchase and then use it for one's own purposes. In the reported case, an advertising agency paid the sales price of  DM 7,500 plus DM 1,200 VAT to obtain the fancied domain. The dispute was all about if the agency could deduct the purchase price or not.

The Federal Tax Court considered the purchase price for domains from one holder to another as a generally non-deductible as the asset is not consumable. Non-consumables cannot be depreciated (§7 EStG). This is at least true for domains with a publicity of worth maintaining quality. The possible use of a domain name is not limited by time and therefore is not consumable.

The only remaining question concerns the deductibility of the paid VAT amounting to DM 1,200. Since this VAT qualifies as input tax, it does not belong to the purchase price but is still a deductible operational expense (§ 9b Abs. 1 EStG).