Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
The acquisition of shares (share deal) in exchange for cash or shares does not generally affect the target company itself (there are certain exceptions such as net loss carry-forwards, which may cease to exist, or recapture rules under the Austrian group taxation regime). The company continues to record its assets at book values. At the shareholder level, if shares are sold for cash, the selling shareholder realises a capital gain or loss equal to the difference between the sales price and the value of the shares in his or her books. A share-for-share exchange is generally also taxable, but may qualify for rollover treatment under the Austrian Reorganisation Tax Act.
When acquiring shares in an Austrian corporation, the acquirer has to capitalise the shares at their acquisition cost. In the case of a future disposal of the shares, a capital gain is subject to corporate income tax at a rate of 25 per cent or at the special income tax rate of 27.5 per cent if the seller is an individual. A capital gain is computed by deducting the book value of the shares at the time of disposal from the proceeds from sale less the costs of disposal.
In the course of the acquisition of business assets and liabilities (asset deal), the price has to be attributed to the transferred assets (ie, such a transaction is treated as if the purchaser has bought the various assets separately) according to the going concern values of the individual assets of the business in order to determine the acquisition costs of the assets (ie, a step-up that allows for depreciation takes place). The remaining acquisition costs that are not allocable to the transferred assets have to be reported as goodwill. The acquiring company is not entitled to utilise any tax losses available to the selling company in respect of the transferred business.
If interests in a partnership are acquired, this is generally treated in the same way as described above for the asset deal; that is, as a pro rata purchase of the assets and liabilities of a partnership. Besides the purchase for a cash consideration, business assets and liabilities (if they constitute a business unit or division of a business unit) or partnership interests can also be contributed against the issuance of shares, and such transactions may also qualify for rollover treatment under the Austrian Reorganisation Tax Act.
Any capital gain resulting from the disposal of assets or a business is subject to corporate income tax at the standard rate of 25 per cent if the seller is a corporation or up to 55 per cent if the seller is an individual. In principle, there is no difference between the taxation of capital gains resulting from the disposal of assets and capital gains resulting from the disposal of a business (some allowances may apply under very narrow circumstances).
With regards to the differences in VAT treatment, see question 6.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
In the course of an asset deal (or purchase of partnership interests), a step-up in basis in the business assets is achievable. Generally, the acquired assets have to be reported at their acquisition costs in the book of the acquiring company. Subsequently, the acquired assets may be depreciated over their expected useful lives. The differences between the price actually paid for a business and the acquisition costs of the individual assets has to be reported as goodwill. For Austrian tax purposes, the goodwill has to be depreciated over a period of 15 years on a straight-line basis.
There is no goodwill deduction in the case of the purchase of stock in a company acquired after 28 February 2014. For shares acquired before that date in an Austrian target that became a member in an Austrian tax group, a goodwill amortisation over a period of 15 years (capped at 50 per cent of the purchase price) was available. Goodwill amortisations from transactions before that date can be continued, to the extent that the goodwill amortisation influenced the purchase price of the shares. In this context it should also be noted that the statutory restriction of this goodwill amortisation to domestic targets violated EU law, according to case law.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
In a leveraged transaction, a purchaser will usually seek to implement a tax offset structure that is aimed at offsetting interest expense at the acquisition company (AcquiCo) level with profit generated at the target company level. In principle, there are two methods for achieving this.
The first method is to establish a tax group between the AcquiCo and the target company. In such a tax group, the fiscal result of the AcquiCo and the target company is consolidated at AcquiCo level (ie, a negative fiscal result will be offset against a positive fiscal result). If the aggregated fiscal result of the AcquiCo and the target company is negative, the loss can be carried forward by the AcquiCo to future periods. The formation of a tax group requires a tax allocation agreement and an application to the tax office. The required minimum period of a tax group is fulfilled when three full fiscal years have expired. If the tax group is collapsed prior to the lapse of the three-year period, the group members are retroactively taxed on a stand-alone basis.
A second method, which is sometimes discussed but rarely ever implemented because of the significant implementation risk it involves, is an upstream merger of the target company into the AcquiCo. Based on past decisions of the Austrian Supreme Court, it is pretty clear that where the AcquiCo carries the acquisition debt for the purchase of the shares of the target company, a downstream merger of the AcquiCo into the target company will not be registered. In certain exceptional cases, an upstream merger of the target company into the AcquiCo may, however, be feasible. The result of such an upstream merger would be that the shares in the target company pass to the AcquiCo, interest expense on the acquisition debt can be offset against profit, and guarantees and security interests granted by the merged entity (holding the cash-generating assets) are not subject to the limitations under the Austrian capital maintenance rules and thus will be of greater commercial value to the financing banks. In particular, the last point is often of great interest to the financing banks, which is why this route is sometimes explored when a particular case supports the necessary arguments.
Regarding a future exit, it should be taken into account that double taxation treaties usually assign the right to tax capital gains to the state of residence of the shareholder. For that reason, a foreign seller will usually not be taxed on the capital gains in Austria. If, however, the seller is an Austrian tax resident, capital gains taxation applies (ie, no participation exemption is available for Austrian tax residents in relation to Austrian companies). Avoidance of withholding taxes on dividends is usually less of an issue, since pre-exit distributions are very rare. Still, to address that issue, EU entities are usually preferred over non-EU entities and, among the latter, entities from countries with which Austria has concluded a double taxation treaty. Accordingly, if a transaction is not leveraged, a foreign AcquiCo will usually be the preferred structure for a foreign purchaser. In the case of a domestic purchaser, the interposition of a foreign AcquiCo would be under high scrutiny by the tax authorities.Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
Company mergers or share exchanges as a form of acquisition are not as common between unrelated parties as in other jurisdictions such as the UK or the US. Accordingly, the transaction currency will usually be cash instead. However, when the parties aim to enjoy a rollover treatment, merger or share for share exchanges can be an attractive option.
Under Austrian tax law, mergers within the scope of the Austrian Reorganisation Tax Act are tax neutral provided that the possibility to tax unrealised gains at the level of the legal successor (receiving company) is not restricted. In the case of a restriction, a merger into a receiving company in the sense of article 3 of the EU Merger Directive in its current version or if the receiving company is resident in an EU member state or an EEA country, the merger is taxable but the respective tax payment is deferred up to five annual instalments upon request of the transferring company. If the receiving company does not meet the aforementioned requirements, the merger triggers immediate taxation. Towards EU or EEA entities this is a new and less favourable regime that applies to reorganisations resolved as of 1 January 2016, while reorganisations before that date could apply for a deferral of taxation until capital gains had actually been realised, and such taxation had been time-barred after 10 years. Accordingly, whereas under the past regime an exit taxation had often been avoided, this is no longer possible under the new regime. If capital gains were deferred under the old regime, the tax in such cases is also divided in five instalments if so requested by the taxpayer.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
Beside the possibility of the tax-neutral reorganisation under the Austrian Reorganisation Tax Act there are no further tax benefits to the acquirer in issuing stock as consideration rather than cash. However, in order to benefit from such tax-neutral reorganisation, it should be noted that the stock granted in consideration for the received assets does not necessarily have to be newly issued stock, but may also be existing stock (eg, transferred from other shareholders).Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
There are no transfer taxes as such levied on the sale of shares in a corporation or on the sale of assets in Austria. Note that (minor) court fees for registration in the Commercial Register have to be paid.
Additionally, Austria levies stamp duties on a wide range of legal transactions, including:
- lease agreements (exemption for residential lease agreements) (rate of 1 per cent);
- assignment agreements (rate of 0.8 per cent);
- agreements regarding easements (rate of 2 per cent);
- agreements regarding sureties (rate of 1 per cent); and
- pledge agreements regarding real estate (rate of 1 per cent).
Stamp duties are triggered whenever a written deed evidencing the transaction is signed in Austria or, in cases where the deed is signed outside of Austria, if certain criteria being considered as substitute documentation are fulfilled (note that it is not the transaction as such that triggers the stamp duty but rather the written deed). Stamp duties can thus be legally avoided if no written deed at all is set up by carefully carried out strategies. Debtors of the stamp duties are basically all parties of the agreements.
The sale of shares in a corporation is VAT exempt without the right to deduct value added input tax. The sale of assets is subject to VAT at a rate of 20 per cent. In this case, however, the exemptions set out in the Austrian Value Added Tax Act (eg, for real estate or shares) remain applicable. The sale of a business as a going concern is treated as the sale of the underlying individual assets (ie, there is no VAT-exemption for the sale of a business in its entirety). Therefore, the price of the business has to be divided according to the going concern values of the underlying assets. Tax rates and exemptions are applicable according to regular VAT law.
Real-estate transfer tax (standard rate is 3.5 per cent) is levied on every acquisition of domestic real estate and in some cases also if shares in corporations or interests in partnerships that directly own Austrian real estate are transferred. In particular, the transfer of buildings and land, building rights and buildings on third-party land falls within the scope of the Austrian real-estate transfer tax; the transfer of machinery and plants is not subject to real-estate transfer tax. Tax base of the real-estate transfer tax is the amount of consideration for the transfer (fair market value), at least the value of the real estate.
According to the last tax reform (applicable to transactions effected after 31 December 2015), real-estate transfer tax is triggered if 95 per cent (before the reform: 100 per cent) of the shares of a company that directly holds Austrian real estate are consolidated in the hands of one shareholder or a group of shareholders within the meaning of the Austrian group taxation regime. Furthermore, the tax reform also added a new taxable event: if within a period of five years 95 per cent or more of the partnership interests of a partnership that directly holds real estate are transferred, this triggers real-estate transfer tax (under the scope of this new rule this can include several transactions with different purchasers). In each case, the real-estate transfer tax amounts to 0.5 per cent of the value of the real estate. The changed law now states that shares held by trustees are to be attributed to the trustor for the purpose of calculating the 95 per cent threshold. If Austrian real estate is transferred in the course of a reorganisation under the Reorganisation Tax Act, the real-estate transfer tax will likewise be 0.5 per cent of the value of the real estate. The taxation based on the value of the real estate - in absence of a consideration that otherwise would be the tax base - was also introduced by the recent tax reform. Before that, taxation in such cases was based on an assessed value of real estate for tax purposes that usually was much lower than the fair market value.
In addition to real-estate transfer tax, a registration duty for the land register at a rate of 1.1 per cent, also based on the purchase price or the value of the real estate, is levied if a new owner is registered (ie, not if shares are transferred, as the owner of the real estate does not change in such case).Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
Insofar as losses are not deductible in one year they can be carried forward (there is no carry-backward available) to the next years for corporate income tax purposes. Pursuant to section 8, paragraph 4, No. 2 of the Austrian Corporate Income Tax Act, a deduction of loss carry-forwards up to the amount of 75 per cent (with certain exceptions that allow a deduction of 100 per cent, such as in the course of a liquidation or if a business unit is sold) of operating income is possible.
According to section 8, paragraph 4, No. 2, c of the Austrian Corporate Income Tax Act, loss carry-forwards expire if the economic identity of the taxpayer has changed in a significant way. The law stipulates a three-part test to establish if such change has occurred. There has to be:
- a substantial change in the organisational structure;
- a substantial change in the economic structure; and
- a substantial change in the shareholder structure that has been made against consideration.
Generally, all three requirements have to be cumulatively met to consider that the economic identity of the taxpayer has changed significantly. Despite the foregoing, some may be less pronounced, as the assessment depends on an overall view of relevant requirements, taking into account all facts and circumstances. While the objective of the shell company acquisition regime is to deny the possibility to buy a company just to benefit from existing tax loss carry-forwards, there is no motive test that would provide for an exemption from the regime if the taxpayer can clearly demonstrate that the transactions was not tax-driven. Even clear business reasons for the transactions do not hinder the application of the regime. In general, the law does not provide for a certain time period in which the three criteria have to be fulfilled cumulatively. The fulfilment of all three criteria within a short time-frame is a strong indication that a shell company acquisition took place. However, the relevant observation period may cover several years as long as the single steps can be considered to be parts of a larger plan to effect the relevant changes leading to the loss of the economic identity.
Even if the conditions are fulfilled, the loss carry-forwards do not expire if the changes are made for purposes of a restructuring of the corporation with the goal of saving a substantial number of existing jobs and its trade or business (that is, an escape clause). A substantial number of jobs is generally given if 25 per cent of the employees are retained. Such exemption will thus usually not be met if a holding entity or a similar vehicle is restructured.
Given that loss carry-forwards do expire as a result of the loss of the economic identity, section 8, paragraph 4, No. 2, c of the Austrian Corporate Income Tax Act stipulates a very important exemption: any taxable income arising from the substantial economic change (eg, sale of assets or business premises) in the year of loss of the economic identity can be offset with the loss carry-forwards before they expire.
Acquisitions or restructurings of bankrupt or insolvent companies are not subject to any special rules or tax regimes in Austria, although cancellation of debt, which generally is taxable in Austria, may enjoy a reduced taxation if certain requirements are met.Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
Pursuant to section 11 of the Austrian Corporate Income Tax Act, interest - in a narrow sense - on funds used to finance the acquisition of shares is tax deductible for corporate income tax purposes.
Expenses related to the payment of interest to foreign recipients are in general deductible from the corporate income tax base. However, the deductibility of interest payments is limited in the case of loans between related parties. Accordingly, expenses with interest are not deductible from the tax base of an Austrian corporation as long as, cumulatively:
- the interest is paid to an Austrian company or a foreign company that is comparable to an Austrian company;
- the interest is paid to a company that is directly or indirectly part of the same group of companies or is influenced directly or indirectly by the same shareholder; and
- the interest payments in the state of residence of the receiving company are not subject to tax because of a personal or objective exemption:
- subject to tax at a rate lower than 10 per cent; or
- subject to an effective tax at a rate lower than 10 per cent due to any available tax reduction.
It is not relevant whether taxation at a rate lower than 10 per cent is based on the domestic law of the state of residence of the receiving company or the applicable double taxation treaty concluded between Austria and the respective state of residence. If the receiving entity is not the beneficial owner, the respective conditions have to be investigated at the level of the beneficial owner (eg, in certain back-to-back refinancing scenarios). Although not limited to cross-border payments in other jurisdictions, one should note that Austria, as of today, has no interest barrier rule. Accordingly, interest payments made to third (ie, unrelated) parties are always tax-deductible. However, as a result of the OECD BEPS project, it is notable that recently adopted EU legislation provides for such interest barrier rule to be implemented by the EU member states before and applied as of 1 January 2019. However, member states may postpone the implementation of such interest barrier rule until 2024 if they have equally effective measures in place. In this respect, it is still under discussion whether the above described provision regarding the non-deductibility of interest payments to low-taxed group companies may be considered equally effective in order to avoid the application of the interest barrier rule as from 2019. While the EU Commission denied this in December 2018, the Austrian tax administration is still of the opinion that the existing provisions in connection with interest payments to related parties are sufficient as national implementation. It is expected that the EU Commission will initiate proceedings against Austria in that respect.
The Tax Reform Act 2020 (legislative draft under discussion) foresees anti-avoidance rules targeting hybrid cross-border structures. Specific structures leading to a tax deduction in one state without any corresponding taxable income in the other state (Deduction/No Inclusion) as well as structures enabling a double tax deduction in two different states (Double Deduction) shall be prevented. The new provisions shall apply to specific structures defined by law (eg, hybrid financial instrument, hybrid transfer, hybrid entities, hybrid permanent establishment (PE) and unconsidered PE) and shall lead to tax deduction of expenses failed or taxable income in Austria, as well as to tax deduction of expenses failed in Austria. The new rules for hybrid cross-border structures shall apply as of 1 January 2020.
Despite the fact that there are no Austrian statutory rules on thin capitalisation, as a matter of administrative practice and under the case law, loans from related parties to an Austrian company may be considered to be ‘hidden’ equity and not debt if the Austrian corporation is considered to be thinly capitalised. A shareholder loan may be requalified as deemed equity in the following scenarios:
- lack of sufficient equity in relation to the long-term funding requirements of the business;
- excessive debt financing (debt to equity ratios far below the market standard);
- inability of the borrower to obtain a loan at comparable terms from third parties; or
- the loan agreement grants rights to the lender similar to those of shareholders.
In such a case, the interest is reclassified as dividends for Austrian tax purposes, but these deemed dividends may not, in some cases, benefit from treaty or directive reductions. While there is no official safe-harbour rule, the Austrian tax authorities generally accept debt-to-equity ratios of around 4:1 to 3:1. However, this can only serve as guidance and the adequate debt-to-equity ratio has to be analysed on a case-by-case basis. Having said that, higher debt-to-equity ratios have also been accepted.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
Tax risks are usually covered by warranties or indemnities. Tax warranties typically foresee a time limitation of around seven years. No liability is usually agreed for mere timing differences (eg, if tax authorities request longer tax depreciation periods) or if the tax risks had already been accounted for (eg, through provisions). Warranties are usually qualified by matters that have been disclosed (in a certain manner) or are deemed disclosed by operation of the provisions of the acquisition agreement or the disclosure letter. Indemnities are generally not qualified by disclosure or knowledge. The tax indemnity is usually only subject to a specific tax conduct provision, a direct loss limitation and the overall cap. In some cases, additional protection is obtained by warranty and indemnity insurance. If a tax warranty or indemnity is triggered, the seller will usually have the right to pursue tax litigation at his or her own risk and expenses to mitigate a potential liability. Payments under tax warranties or indemnities result in a retroactive change as regards the profit or loss generated by the seller and the acquisition costs recorded by the purchaser and thus have only indirect tax consequences, rather than being taxable as such. If, however, additional payments such as liquidated damages are agreed upon, these would be subject to tax by the recipient. There is generally no withholding tax on such payments. Insurance is less common than in other jurisdictions, such as Germany, but will often include taxes. To conclude, insurance only for taxes is very rare.