The tax expense consists of corporation and trade income taxes for the companies domiciled in Germany as well as comparable income taxes for foreign companies. As a result of changes in tax rates at individual companies, a total deferred tax expense of €21.3 million was recorded. The changes relate mainly to deferred taxes resulting from the elimination of intercompany profits. Deferred taxes for exceptional items mainly comprise deferred taxes resulting from the remeasurement of inventories within the scope of the purchase price allocation with the acquisition of the Serono companies in January 2007.

The reconciliation between deferred tax assets and liabilities shown in the balance sheet and deferred taxes in the income statement is presented below:

As of the balance sheet date, tax loss carryforwards totaled €528.0 million (2006: €137.3 million). The increase over the previous year is mainly the result of the inclusion of the Serono companies. Deferred tax assets are recognized for tax loss carryforwards only if realization of the related tax benefit is probable in the foreseeable future. The vast majority of these loss carryforwards have no expiry date or can be carried forward for up to 20 years. Deferred tax assets were not recognized for losses or loss carryforwards totaling €175.8 million (2006: €118.4 million) since realization of the related tax benefits is not currently expected in the planning period. In 2007, the income tax burden was reduced by €8.3 million due to the utilization of tax loss carryforwards and tax credits from prior years for which no deferred tax asset had been recognized in prior periods (2006: €4.4 million). Deferred tax assets as of the balance sheet date relating to tax loss carryforwards totaled €63.9 million (2006: €5.9 million). No deferred tax liabilities were set up for temporary differences for interests in subsidiaries, since the reversal of these differences is not foreseeable. Deferred tax assets of €400.3 million (2006: €263.2 million) were recognized for other temporary timing differences.

Deferred tax assets and liabilities correspond to the following balance sheet items:

The following table presents a tax reconciliation based on the theoretical tax rate which would result by applying the statutory tax rates of the German and foreign companies in proportion to their contribution to consolidated profit leading to the effective income tax expense before exceptional items and the effective income tax expense according to the income statement.