Austria: Austria As Location For CEE Holdings - Why, How, When?

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

As a result of the financial and economic crisis, global foreign direct investment (FDI) has been declining since mid-2008. With a certain delay, the decline also struck CEE in 2009. Most recent reports, such as the UNCTAD World Investment Report 2009, do however forecast an end of the downturn by as early as 2010 and a recovery in 2011 at the latest. Companies that have already done their homework induced by the crisis are therefore well advised to prepare themselves now for the expected resurgence.

Once the business strategy and the operative targets have been clearly defined, it may also be necessary to think about the ideal location for the main and/or regional headquarter(s) in CEE. Austria is attractive in many respects.

CEE know-how ...

Proximity to CEE markets still constitutes the main crosssector argument in favour of Austria as an investment location. CEE hot spots are quickly reachable by direct flights, trains and road links. Even more decisive is the know-how of the local workforce and consultants built up over the past two decades. In 2007, more than 70% of Austrian expatriates worked in this region1. As to external consultants, a quick glance at the orientation of the major Austrian companies (in particular the large corporate law firms) reveals a clear and coherent strategy: Strengthening and further expansion of the market position as major regional players in CEE. Companies located in Austria often have easier and quicker access to these resources, thus significantly facilitating their expansion steps into and within CEE.

... and tax goodies

With the reduction of the corporate income tax rate to 25% (flat tax) and the introduction of the group taxation scheme in 2005, Austria provided significant additional incentives for international corporations to move their headquarters to Austria. Losses of foreign subsidiaries can now be offset against profits of the Austrian parent company, thus reducing the corporate income tax burden in Austria (on the condition that a tax group has been established in time).

The increase of FDI into and out of Austria in recent years serves as proof of the success of these measures, as well as the attractiveness of Austria as an investment location for CEE holdings. Whereas FDI into Austria averaged USD 2.8 bln p.a. between 1990 and 2000, it increased to ca. USD 15.5 bln p.a. between 2005 and 2008. This is an increase of approximately 450%2. Even when adjusted for the extraordinary effects in the record year 2007, when the four major M&A transactions3 alone accounted for an FDI inflow of around EUR 8 bln (ca. USD 11 bln), the increase is significantly higher than in peer countries4. The statistics are even more impressive for FDI out of Austria, which increased 900% in the above-mentioned period, much of it into the CEE region (see above).

Large, family-owned companies in particular should consider a transfer of their seat to Austria for another reason. Since August 2008, the inheritance and gift tax has been abolished in Austria, resulting in some interesting opportunities for inter-generational tax optimisation strategies.

Overcoming legal obstacles

Once the decision has been taken to choose Austria as seat for the CEE headquarters, the question arises how to transfer the current headquarters to Austria. Unfortunately, the freedom of establishment stipulated under the EC Treaty helps only to a limited extent. According to the case law of the European Court of Justice (ECJ)5, a member state (in this case, Austria) may not prevent a company incorporated under the laws of another member state (i.e. the state of origin) from transferring its de facto headquarters to Austria. The state of origin may, however, prevent the company from doing so. This scenario gives rise to the disadvantage that the company is registered in two member states. The registration in the commercial register of the state of origin continues while in Austria a local branch is registered. The result may be that, following the seat transfer, two different company laws are applicable, if the state of origin applies the incorporation theory rather than the company seat theory6.

In order to prevent this, it is often advisable to transfer the (de facto) centre of main administration and the registered office (seat) at the same time. As a result, the company's registration in the commercial register of the state of origin would be cancelled without liquidation and the company would be registered in Austria. The company would then only be subject to Austrian company law.

Unfortunately, this procedure is only possible for companies established in the legal form of a Societas Europaea (SE)7. The envisaged Seat-Transfer Directive, which should have governed this procedure also for other types of companies throughout the EU, did not pass the draft stage and has in the meantime been put ad acta. Thus, a cross-border transfer of the registered office of companies other than an SE is either considered void or re-interpreted as a decision to dissolve the company; a decision that is normally ex lege followed by the liquidation of the company in the state of origin8.

This leads to the question of what to do if a transfer of the registered office is prudent from a business perspective but establishing an SE is not possible or not otherwise appropriate (e.g. due to the more complex internal organisation of the SE, which is based on the concept of a joint-stock company).

The only practical solution currently available is the crossborder merger. The EU Cross-Border Mergers Directive9 foresees the possibility of a cross-border merger of a national limited liability company with a limited liability company from another member state throughout the EU since the beginning of 2008. In order to attain a "transfer of the registered seat" to Austria, a merger vehicle (limited liability company or joint stock company) is set up in Austria. The company of the state of origin, as transferring entity, is then merged into the Austrian company as surviving entity. Apart from the tax consequences, issues concerning protection of creditors, protection of minority shareholders and participation of employees must be taken into account.

The time is now!

The worldwide recovery of the stock markets in the second and third quarter of 2009 foreshadows the return to (moderate) growth for 2010 and 2011. If the current projections can be realised, they should also result in a resurgence of FDI in CEE.

Therefore, companies who wish to use Austria as a basis for a future CEE expansion are well advised to act now. As shown above, the legal hurdles of transferring the seat of a company can be overcome with appropriate planning.

The current phase of reduced activity in CEE could be used to build a solid basis for future growth, either through Greenfield projects or M&A transactions. With CEE know-how and tax incentives, Austria offers unique advantages as a regional headquarters for holding companies of international groups.

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


1 Cf. Österreichische Nationalbank, Statistiken Sonderheft, Direktinvestitionen 2007 of September 2009. As regards the foreign subsidiaries of Austrian companies, more than half of them were located in CEE in the same period of time. At the end of 2007, approximately EUR 51.1 bln out of a total of approximately EUR 103 bln of FDI from Austria were allotted to FDI in CEE.

2 Cf. United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2009. (

3 I.e. (i) the acquisition of Austrian bank BAWAG by the financial investor Cerberus, (ii) the acquisition of the majority of shares in Hypo Alpe Adria (Carinthian bank) by BayernLB, (iii) the acquisition of the mobile communication provider ONE by Orange and Mid Europa Partners, and (iv) the acquisition of a 30% stake in construction company STRABAG by Rasperia/Basic Element.

4 The comparative value for Germany was ca. +60%. 5 Cf. ECJ 16.12.2008, Case C-210/06, Cartesio. See also ECJ, 9.3.1999, Case C-217/97, Centros;

5.11.2002, Case C-208/00, Überseering; 30.9.2003, Case C-167/01 Inspire Art.

6 Art 10 of the Austrian Act on Private International Law (§ 10 IPRG) provides that a legal entity shall be subject to the corporate laws (personal statue) of the jurisdiction of its actual seat of main administration (company seat theory as applicable in Austria and other member states). The incorporation theory on the other hand looks at the jurisdiction of the place of incorporation or (main) registration of the legal entity.

7 Austrian legal writing partly assumes that this should also apply to other types of companies and wants to use the rules applicable for the SE analogously; cf. Eckert, Sitzverlegung von Gesellschaften nach der Cartesio-Entscheidung des EuGH, GesRZ 2009, 139.

8 The latter conception should (still) be prevalent in Austria, cf. Koppensteiner, GmbH Gesetz Kommentar3, recital 4a to § 4 with further references.

9 Directive 2005/56/EC on cross-border mergers of limited liability companies from different Member States, implemented into Austrian law by the EU merger law (BGBl. I No. 72/2007) which entered into force on 15 December 2007.

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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