Austria's group taxation regime enables the taxpayer to claim goodwill amortization for shares acquired in an Austrian subsidiary under specific conditions. By virtue of applying the EC Freedom of Establishment, Austria's Independent Finance Tribunal has extended the scope of such goodwill amortization to a corporate taxpayer's acquisition of shares in subsidiaries in the European Union.
Prior to the introduction of the group taxation regime in 2005, goodwill amortization could only be claimed in the case of an asset deal. However, with the group taxation regime coming into effect as of 2005, the legislator simultaneously introduced a goodwill amortization on the occasion of a share deal in case an Austrian tax group is established.
Calculation of goodwill amortization
Pursuant to the group taxation rules, goodwill acquired in the course of the acquisition of shares in an Austrian corporation by a member of a tax group can be amortized and subsequently deducted for tax purposes. For group taxation purposes, goodwill is calculated as follows:
- acquisition cost of the shares of the group member being acquired as defined for tax purposes
- minus the (proportionate) amount of equity of the group member acquired (as set out in the corporation's financial statements)
- minus the (proportionate) amount of any hidden reserves contained in the non-depreciable fixed assets of the acquired corporation.
In any case, goodwill is limited to 50% of the acquisition cost and is to be amortized over a period of 15 years.
Note that claiming goodwill amortization is not at the discretion of the taxpayer. Therefore, if shares in a subsidiary are purchased and such subsidiary will form part of a tax group, positive (or, as the case may be, also negative) goodwill has to be recorded.
Claiming goodwill amortization leads to the book value of the shares in the target being reduced accordingly, i.e. by the amount of goodwill, thereby increasing a potential capital gain on the future sale of the target's shares. As a result, goodwill amortization only leads to a temporary tax benefit. However, the longer the shares in the target are held, the higher the tax benefit of goodwill amortization will be.
Conditions for claiming goodwill amortization
Claiming goodwill amortization is, however, subject to specific restrictions: First, goodwill amortization may only be claimed for acquisitions of shares in corporations actively engaged in a trade or business; thus, acquisitions of pure holding companies are excluded. Second, the amortization of goodwill is – according to current legislation – limited to (i) acquisitions of shares in Austrian corporations, as well as to (ii) acquisitions of shares in corporations that are neither directly nor indirectly acquired from certain related (group) corporations, thereby comprising only third-party transactions.
Third, claiming goodwill amortization is contingent upon the subsidiary's membership within the Austrian tax group. Therefore, if such target drops out of the tax group, that part of goodwill not yet amortized at the time of the target's exit will be lost. Fourth, Austrian tax law provides for several recapture provisions in case of the acquired group member being subject to specific reorganization schemes.
Recent court law
In a recent decision, the Austrian Independent Finance Tribunal dealt with the question whether the restriction of goodwill amortization to the acquisition of shares in an Austrian corporation (thereby excluding EU-based subsidiaries from its scope) is in conformity with EC law. Eventually, the Tribunal came to the conclusion that such restriction contravenes the EC Freedom of Establishment. As a result, goodwill amortization shall also be available for the acquisition of shares in subsidiaries resident within the EU Since the Austrian tax authority filed an appeal against such decision, the case is currently pending before Austria's Supreme Tax Court.
From a practical point of view, a taxpayer which acquired shares in tax group members resident within the EU in the past (more precisely, during those years for which the corporate income tax return for the tax group has not yet been filed or is still open), may consider claiming goodwill amortization for such acquisition. In light of this recent decision of the Austrian Independent Finance Tribunal, claiming goodwill amortization should also be considered with respect to future acquisition of shares in eligible EUC subsidiaries that will form part of an Austrian tax group.
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.