The Austrian Group Taxation System: An Interesting Tool for Cross-Border Tax-Planning

Long before the ECJ decision dealing with Marks & Spencer, the old “Organschaft” system was replaced by a new and modern group taxation system in Austria which turned out to be second to none. This new group taxation system came into force on January 1, 2005 and enables corporate entities with their seat in Austria to qualify their domestic and foreign subsidiaries as branches for tax purposes and therefore can set off possible losses of these domestic and foreign subsidiaries from their own tax base. However, not only Austrian companies have access to this tax tool; foreign corporations with their registered branches in Austria can also make use of this system.

Which conditions have to be met to form a group?

In sec. 9 of the Austrian Corporate Income Tax Act the conditions for forming a group are laid down. These conditions are:

•   A majority shareholding, meaning more than 50 per cent held by the group parent in the subsidiary;
•   The group parent has to have the majority of the voting rights;
•   The group must be established for at least three years;
•   A formal application must be submitted to the tax authorities.

Please see Diagram 1.

Who can be group parent?

• Group parents can be
• Corporations
• Co-operatives
• Insurance companies
• Credit institutions.

All of the above have to be subject to unlimited tax liability in Austria.

• Foreign entities (as enumerated in the EC-Directive No. 90/435/EC, dated June 23, 1990) and other foreign entities comparable to domestic corporations or comparable companies having their seat and place of effective management in the EEA and being subject to limited tax liability in Austria
• A group of group parents whereby this group is either formed via a partnership, a syndication agreement, or via joint control provided that this group of group parents consists of entities as mentioned above. One of these group parents must hold at least 40 per cent and the other group parents at least 15 per cent in the group companies.

Please see Diagram 2.

Group companies

Group companies can be either:

•   Corporations and co-operations subject to unlimited tax liability in Austria; or
•   Foreign entities whereby a direct shareholding in such a foreign entity, either by a different group company subject to unlimited tax liability in Austria, or by a group parent is required.

There is no restriction to companies in tax treaty countries.

Tax effects of a group

The Austrian Corporate Income Tax Act foresees that 100 per cent of the results of a domestic group company are allocated to the group parent irrespective of the shareholding of the group parent in this group company (of course, meeting the more than 50 per cent threshold as required by law). This would be the case, for example, if the group parent holds 60 per cent of the group member, but nevertheless 100 per cent of the results of the group members are allocated to the group parent for tax purposes.

Amortisation of share price

The new group taxation system in Austria brought an end to the never-ending discussion of whether a transaction should be a share deal or asset deal. Similar to an asset deal, a goodwill can be amortised over a period of 15 years and is fully tax deductible. In the case of an asset deal, the goodwill is the amount which exceeds the difference between assets and liabilities. In the case of an acquisition of shares, the difference between the share price and the equity of the target company is seen as goodwill, of which 50 per cent can be amortised over a period of 15 years, and can be deducted from the tax base of the company which acquired the shares.

Tax treatment of group members (subsidiaries)

One of the key features of the new group taxation system is that the result of a domestic subsidiary’s being a member of the group is not taxed in the hands of the subsidiary, but is allocated to the group parent for tax purposes, regardless of whether it is a profit or a loss. In the case of a foreign group member, again the threshold of more than 50 per cent shareholding has to be considered. Nevertheless, in the case of a foreign subsidiary, only an amount of the results equivalent to the percentage of the shareholding in the foreign subsidiary is allocated to the group parent. This only refers to losses of the foreign subsidiary, not to profits. Profits stay untaxed, are not included in the tax base of the Austrian group parent, and are tax exempt if paid as a dividend to the group parent.

It is essential to know that the losses of the foreign group member have to be calculated according to Austrian tax law. A loss utilisation by an Austrian group parent resulting from losses of a foreign group member has to be recaptured if this foreign group member uses its losses (in the form of a loss carry-forward) to compensate its own profits. It is again essential to know that it might be that the foreign group member does not show losses according to local accounting regulations, whereas for Austrian tax purposes the foreign group member reflects losses in its balance sheet, set up according to Austrian regulations. The reason for that is mainly resulting from the fact that Austria does not know any debt equity regulations or thin capitalisation rules, and interest paid by the foreign group member which is not tax deductible for local tax purposes will be considered for defining the tax base of the foreign subsidiary for Austrian group taxation purposes.

Furthermore, all tax incentives as defined by Austrian tax law have to be considered in calculating the result of the foreign subsidiary. In such a case, the foreign group member will not make use of a loss carry-forward since it suffered no losses according to local regulations, and therefore the loss, utilised to compensate other taxable profits in the hands of the Austrian company, has not to be recaptured. Such losses also have to be recaptured when the group is dissolved within a period of three years after its establishment, or when one of the members of the group leaves the group within these three years.

Benefits of the group taxation system

The benefits of the group taxation system in Austria are evident. Not only does it enable an Austrian company or an Austrian branch of a foreign corporation to compensate its positive income with losses of its subsidiary, regardless of whether from a domestic or foreign subsidiary, but it also enables a group of companies to allocate losses to other entities where necessary.

The following example will demonstrate how far the impact of the Austrian group taxation system goes in the international context and how efficiently it can be used for tax planning.

Example:

A foreign company wants to acquire an Austrian corporation which is engaged in the hotel business. The Austrian company runs a very profitable hotel in Austria and plans to acquire another Austrian hotel and to establish a new hotel at the Black Sea in Bulgaria. The Austrian hotel to be acquired shows profits, whereas the hotel in Bulgaria will suffer from losses during the start-up period expected to last for three years and will then become profitable according to the business plan. The optimal use of the Austrian group taxation system will result in the following structure:

The foreign corporation xyz Ltd establishes an Austrian NEWCo, GmbH, which acquires the shares of the existing Austrian Hotel GmbH with the help of a loan granted from a foreign lender. The Austrian Hotel GmbH itself acquires the new Austrian Hotel GmbH and establishes the Bulgarian Hotel GmbH. Based on the regulations of the Austrian group taxation system, the Austrian NEWCo now forms a group with its subsidiaries.

The tax impact of this structuring is as follows (please see Diagram 3): The profits of the new Austrian Hotel GmbH and the Austrian Hotel GmbH are no longer taxed on the level of these companies, but in the hands of the Austrian NEWCo. Interest for the loan granted by the foreign lender is fully tax deductible and not due to any withholding taxes in Austria. 50 per cent of the acquisition price of the shares in the Austrian Hotel GmbH can be amortized over a period of 15 years by the Austrian NEWCo and reduces its tax base. Losses resulting from the Bulgarian Hotel company can be set off from the tax base of the Austrian NEWCo.

Profits of the Austrian Hotel GmbH and the new Austrian Hotel GmbH are only taxed on the level of Austrian NEWCo where they are compensated by the losses of the Bulgarian Hotel company, the interest paid for the loan and the amortisation of 50 per cent of the acquisition price of the shares of the Austrian Hotel GmbH.

Conclusion

The Austrian Group Taxation System is another cornerstone of the already very friendly tax system in Austria, offers far-ranging possibilities for cross-border tax optimisation within a group and offers material support in cases of mergers and acquisitions.