34 » Income Taxes

adidas AG and its German subsidiaries are subject to German corporate and trade taxes. For the years ending December 31, 2023 and 2022, the statutory corporate income tax rate of 15% plus a surcharge of 5.5% thereon is applied to earnings. The municipal trade tax is approximately 11.4% of taxable income.

For non-German subsidiaries, deferred taxes are calculated based on tax rates that have been enacted or substantively enacted by the closing date.

Deferred tax assets and liabilities

Deferred tax assets and liabilities are offset if:

• the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
• the same taxable entity; or
• different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

As a result they are presented in the consolidated statement of financial position as follows:

The movement of deferred taxes net is as follows:

Gross company deferred tax assets and liabilities after valuation allowances, but before appropriate offsetting, are attributable to the items detailed in the table below:

Deferred tax assets are recognized only to the extent that the realization of the related benefit is probable. For the assessment of probability, in addition to past performance and the respective prospects for the foreseeable future, appropriate tax structuring measures are also taken into consideration.

Deferred tax assets for which the realization of the related tax benefits is not probable decreased from € 406 million to € 308 million for the year ending December 31, 2023. The majority of this amount relates to capital tax losses in the US, which expire in 2027 and can only be offset against capital income. The remaining unrecognized deferred tax assets relate to subsidiaries operating in markets where the realization of the related tax benefit is not considered probable.

adidas does not recognize deferred tax liabilities for unremitted earnings of non-German subsidiaries to the extent that they are expected to be permanently invested in international operations. These earnings, the amount of which cannot be practicably computed, could become subject to additional tax if they were remitted as dividends or if the company were to sell its shareholdings in the subsidiaries.

Tax expenses

Tax expenses are split as follows:

The deferred tax income includes tax expense of € 7 million in total (2022: tax expense of € 6 million) related to the origination and reversal of temporary differences.

The company’s applicable tax rate is 27.4% (2021: 27.4%), being the applicable income tax rate of adidas AG.

The company’s effective tax rate differs from the applicable tax rate of 27.4% as follows:

In 2023, the effective tax rate was 189.2%. The effective tax rate in 2022 was 34.5%.

The line item ‘Non-deductible expenses’ includes tax expense/benefits relating to tax-free income, movements in provisions for uncertain tax positions and tax expense/benefits relating to prior periods. In 2023, the tax income relating to prior periods is € 9 million (2022: tax income of € 118 million).

For 2023, the line item ‘Losses for which benefits were not recognizable and changes in valuation allowances’ mainly relates to valuation allowances in respect of Russia (€ 12 million) and a release to the valuation allowances for the US and Argentina (€ 13 million). For 2022, this line item mainly related to changes in valuation allowances for the US, Argentina, and Brazil.

For 2023, the total tax benefit arising from previously unrecognized tax losses, credits or temporary differences in prior years that is used to reduce current tax expense was € 6 million, mainly relating to Argentina and Lebanon (2022: € 5 million).

For 2023, there were no effects of changes in tax rates that exceed € 1 million. For 2022, this line item mainly reflected a tax rate change in Switzerland.

The group is within the scope of the OECD Pillar Two model rules (Global Minimum Tax). Pillar Two legislation was enacted in Germany, the jurisdiction in which the company is incorporated, and will come into effect from January 1, 2024. Since the Pillar Two legislation was not effective at the reporting date, the group has no related current tax exposure. The group applies the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments to IAS 12 issued in May 2023.

Under the legislation, the group is liable to pay a top-up tax for the difference between its Global Anti-Base Erosion (GloBE) effective tax rate per jurisdiction and the 15% minimum rate. The vast majority of entities within the group have an effective tax rate that exceeds 15%, with material exceptions for subsidiaries in the United Arab Emirates, Hongkong and Switzerland.

The group is in the process of assessing the impact of the Pillar Two legislation. Based on prior years and the accounting profit for the financial year 2023, this assessment process results in an additional expected tax exposure in a low two digit € million range. The group might not be exposed to paying Pillar Two income taxes in relation to most jurisdictions. This is due to the impact of specific adjustments envisaged in the Pillar Two legislation which give rise to different effective tax rates compared to those calculated in accordance with paragraph 86 of IAS 12.

Due to the complexities in applying the legislation and calculating GloBE income, the quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable.