Austria: Austrian Group Taxation: Recapture Of Foreign Losses

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Foreign losses of a non-Austrian corporation that is a member of an Austrian tax group may be utilised in Austria. However, such foreign losses are subject to recapture in Austria when they become utilisable abroad or the non-Austrian group member leaves the Austrian tax group. Besides cases where the non-Austrian group member actually leaves the tax group, substantial changes of the scale of the business of the non-Austrian group member constitute a foreign loss recapture event. Consequently, reorganisations of a non-Austrian corporation that is a member of an Austrian tax group should be closely monitored to avoid an unexpected recapture of foreign losses in Austria.

Utilisation of foreign losses in Austria

Under the Austrian group taxation regime, profits and losses of group members are attributed to the group parent. An Austrian tax group may also include (first tier) non-Austrian subsidiaries, and foreign losses of such non-Austrian group members may be utilised in Austria in proportion to the shareholding in the non-Austrian group member. By providing for an immediate utilisation of such foreign losses, the Austrian group taxation regime exceeds the standards set by the European Court of Justice (ECJ 13 December 2005, Cs C-446/03, Marks & Spencer) in this respect and may be an attractive tool for tax planning.

Recapture of foreign losses in Austria

In principle, foreign losses of a non-Austrian group member must be utilised abroad. Therefore, foreign losses that are (immediately) utilised in Austria have to be recaptured in Austria at the time they become utilisable abroad. This should avoid potential double dips with foreign losses in Austria and abroad. As a consequence of the foreign loss recapture, the (immediate) utilisation of foreign losses in Austria is of a temporary nature and effectively results in a tax deferral in Austria.

A final recapture of foreign losses in Austria applies if a non-Austrian group member leaves the tax group. This recapture includes the entire foreign losses, irrespective of whether already used in Austria to set off profits or carried forward at the level of the group parent that have been utilised in Austria but not recaptured until that time. Whether the non-Austrian group member ultimately has the possibility to utilise the foreign losses abroad is not taken into consideration in this final recapture of foreign losses.

The recapture mechanism does not apply if the non-Austrian group member leaves the tax group within the first three years of being a member of the tax group. In such case, all tax consequences relating to the non-Austrian corporation having been a member of the tax group must be reversed as if the non-Austrian corporation had never been a member of the tax group. This is because an Austrian tax group must exist for at least three years to be effective (i.e. the non-Austrian group member must be a member of the tax group for at least three years).

Leave of the non-Austrian group member

Alienation of shares in the non-Austrian group member

In principle, a non-Austrian group member leaves the tax group if the shares in the non-Austrian group member are alienated (to a purchaser other than another Austrian group member). According to the Austrian Federal Ministry of Finance, also partial alienation of shares in a non-Austrian group member which remains a member of the tax group despite the share sale (i.e. participation in the registered capital and the voting rights of the non-Austrian corporation stays above 50%) may lead to a recapture of foreign losses. In such case, the recapture of foreign losses would apply in proportion to the reduction of the shareholding. Previously, it was possible to avoid a scenario where the non-Austrian group member (partially) left the tax group by certain reorganisations at the level of the non-Austrian group member, e.g. by spinning-off the loss generating business. Such reorganisations did not trigger a recapture of foreign losses even if the non-Austrian group member was a mere shell company as a result of the reorganisation. However, the introduction of the following recapture event, with effect from 1 July 2009, restricted these reorganisation possibilities.

Deemed leave of the non-Austrian group member

A non-Austrian group member is deemed to have left the tax group if the scale of the business, qualified parts of the business, or assets that are not attributable to a business of the non-Austrian group member has decreased to such an extent that from an overall economic perspective it is no longer comparable to the scale at the time the foreign losses were created. When determining the scale of the business or a qualified part of the business of the non-Austrian group member, factors such as turnover, contract volume, fixed and current assets, balance sheet total and number of employees have to be considered. According to the Austrian Federal Ministry of Finance, comparability within the present context is lost if the decrease in scale amounts to at least 75%.

If the non-Austrian group member is deemed to have left the tax group, the recapture of foreign losses applies to those foreign losses that were utilised in Austria until the scale of the business of the non-Austrian group member became no longer comparable to the scale of the business (qualified part of the business or certain assets) at the time the losses were generated. Accordingly, if the non-Austrian group member sells its entire business, the foreign losses that were generated by this business may be subject to recapture. The recapture of foreign losses may become more complex where the scale of the business of the non-Austrian group member varies over time and there is a creeping decrease in the scale of the business – e.g. the non-Austrian group member sold a part of its business several years ago and now downsizes the remaining part of the business. Here, the foreign loss recapture may apply to foreign losses of specific years only.

The deemed leave of a non-Austrian group member as a foreign loss recapture event applies to fact patterns constituted after 30 June 2009. As this may be interpreted to mean that the recapture applies in cases where the loss of comparability occurs as of 1 July 2009, this recapture event may have an indirect retroactive effect (because a decrease in the scale of the business, a qualified part of the business, or certain assets of the non-Austrian group member over previous years of group membership would have to be taken into consideration).

Liquidation of the non-Austrian group member and termination of tax group

A foreign loss recapture event also arises if the non- Austrian group member is liquidated or becomes insolvent. In this specific case, the amount of foreign losses that is subject to recapture may be reduced by previous non-tax-effective depreciation to the lower going concern value provided there has been an actual and final loss of assets. If the amount of the nontax- effective depreciation exceeds the amount of the foreign losses that are subject to (final) recapture, it has been argued that a retroactive reduction of previous foreign loss recaptures should be possible.

Upon termination of the tax group, either entirely or with respect to the non-Austrian group member, a recapture of foreign losses only applies if the tax group has existed for at least three years (in case of earlier termination the entire tax consequences of the tax group must be reversed; see above).

Need for careful planning of reorganisations

The Austrian group taxation regime has been implemented with effect as of 2005. Consequently, many of the newly established tax groups have been in place for the minimum three year period a tax group must exist to be effective. Such tax groups may now consider reorganisations within the tax group without affecting the existence of the tax group to date.

However, where the contemplated reorganisation concerns a non-Austrian group member, it must be kept in mind that reorganisations that result in the liquidation of, or the transfer of the shares in, the non-Austrian group member, or that affect the business of the non-Austrian group member, may cause the non-Austrian group member to leave the tax group, thereby giving rise to a foreign loss recapture event.

Therefore, reorganisations, such as mergers, conversions or split-ups of the non-Austrian group member; and spin-offs or contributions of the shares in the non-Austrian group member, or a business or qualified part of the business of the non-Austrian group member, should be carefully planned in advance. Equally, all other measures that impact on the business of the non-Austrian group member should be regularly monitored in order to ensure that a potential creeping decrease in the scale of the business of the non-Austrian group member is timely recognised and that appropriate action may be taken.

Reorganisations in connection with a non-Austrian group member may have the effect that the non-Austrian group member leaves the tax group and foreign losses have to be recaptured. Equally, the (in certain cases even minor) decrease in the scale of a business or a qualified part of the business of the non- Austrian group member may have such consequences.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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