Post-acquisition planning

Restructuring

What post-acquisition restructuring, if any, is typically carried out and why?

Typical post-acquisition restructurings are the merger of the acquisition company with the target company or the establishment of an Austrian tax group pursuant to section 9 of the Austrian Corporate Income Tax Act. As a result of an upstream merger of the target company into the acquisition company, interest expense on the acquisition debt can be offset against profit. Owing to corporate limitations, the implementation of such a merger is often not feasible. Accordingly, the following paragraphs focus on the establishment of an Austrian tax group.

Austrian companies have the possibility to establish a tax group with subsidiaries by jointly filing a group taxation application before the Austrian tax authorities. The advantages of a tax group are the offsetting of profits and losses within the group (including the losses of foreign group members) and earlier usage of tax loss carry-forwards and the deduction of interest expenses from operational income.

However, as of 1 January 2021, Austria has introduced an interest barrier rule (section 12a of the Austrian Corporate Income Tax Act). In the case of a tax group, the law stipulates that the interest barrier rule is to applied at the level of the group parent company only. As a result, a group interest surplus (interest expenses that surpass interest earnings), is only tax deductible up to an amount that equals 30 per cent of the tax group earnings before interest, taxes, depreciation and amortisation (EBITDA). Generally, per assessment period and tax group, an interest surplus up to €3 million is always deductible (group tax-free amount). If the tax group exists within a larger group (from a corporate law perspective) and the equity ratio of the tax group is similar to the average group equity ratio, interest surpluses can be deducted without restriction. Interest surpluses and EBITDA surpluses can be carried forward without time limitation.

According to the Austrian group taxation regime, a group parent company can form a tax group with a subsidiary if the parent exercises financial control over the subsidiary (namely, the parent owns more than 50 per cent of the capital and voting power in the subsidiary). Group members can include resident companies and non-resident companies if they are resident in an EU member state or in a third state with which Austria has concluded a comprehensive administrative assistance agreement regarding the exchange of information.

With regard to Austrian group members, 100 per cent of the profit or loss of the company is taxed at the level of the parent company (irrespective of the participation held), while losses of non-resident group members are only attributed to the parent to the extent of the direct participation of another national group member or the parent company (profits are not attributed at all). Losses attributed to the Austrian parent company in the past must be recovered in Austria if the non-resident group member offsets the losses with its own income in subsequent years or if the non-resident group member leaves the group. The foreign losses must be calculated based on Austrian tax law, but they can only be offset to the extent that a loss exists according to foreign tax law. Special rules for the recovery of losses apply in the case of liquidation of a non-resident group member. Additionally, foreign losses shall be deductible only to the extent of 75 per cent of the total profit generated by all domestic group members and the parent company.

In general, write-offs with regard to participations in group members are not tax-deductible. For shares acquired in a new Austrian group member, there was an option to record a goodwill element from the acquisition and amortise this asset over 15 years, leading to an additional tax deduction. For shares acquired after 28 February 2014, this option is no longer available. Goodwill amortisations from transactions before that date can be continued, given that the goodwill amortisation influenced the purchase price of the shares.

Other potential post-acquisition reorganisations could be, for example, the change of the legal form (typically a conversion) or the combination of a part of the existing business with the purchased business, which usually would be implemented by a carve-out of the existing one and a combination with the purchased one, which could be implemented either through a straight spin-off by acquisition, or through a spin-off followed by a merger. Sometimes, post-acquisition reorganisations are also aimed at simplifying the structure, for example, if two multinational companies are combined by merging the various local entities. In the cross-border context, another possible post-acquisition reorganisation is the conversion of a local subsidiary into a branch, which is usually implemented by cross-border mergers.

Spin-offs

Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

Within the scope of article VI of the Austrian Reorganisation Tax Act, a spin-off of companies can be effected as tax-neutral (namely, a rollover treatment is available). The spin-off qualifies only if it relates to:

  • a business unit;
  • a division of a business unit
  • a partnership interest with an active trade or business; or
  • a qualifying interest in a corporation (at least 25 per cent of the share capital).

 

In a spin-off, qualifying assets would be transferred from one company to one or more companies, while the transferring company continues to exist. In a split-off, the transferring company dissolves without formal liquidation and ceases to exist. The property can be transferred to a newly established company (split-off by formation) or to an existing company (split-off by acquisition).

In general, the rules set forth in section 8 paragraph 4 No. 2 lit c of the Austrian Corporate Income Tax Act regarding the limitation of deduction of loss carry-forwards also apply to any changes of the structure of a corporation in the course of a reorganisation, such as spin-offs. However, the Austrian Reorganisation Tax Act contains some special provisions supplementing the general rules. The net operating losses of the spun-off business are transferred to the receiving company as long as the assets that caused the transferred losses are also transferred and the scope of the transferred assets is comparable to the scope of the assets in the point in time when the losses occurred.

Under the provisions of the Austrian Reorganisation Tax Act, an exemption from value added tax applies. Stamp duties will usually not be triggered, as the transfer of assets and liabilities is implemented by operation of law according to the principle of universal legal succession. Depending on the assets transferred, real estate transfer tax and registration duties may be triggered. There is no longer any capital duty in Austria.

Migration of residence

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

There are no explicit statutory taxation rules or administrative guidelines (except one provision in connection with the creation or discontinuation of an international participation in the course of the cross-border migration of an Austrian company) that deal with the migration of an Austrian corporation. At the level of the migrating corporation, the following alternatives have been discussed. Some scholars argued in the older literature that the corporation is treated as if it were liquidated. According to section 19 of the Austrian Corporate Income Tax Act, the liquidation surplus at the level of the company would be calculated as the difference between the net assets at the beginning of the liquidation period and the net assets at the end of the liquidation period according to the normal tax and accounting principles. Losses carried forward can be offset against the liquidation surplus without limitation. The distribution of the liquidation surplus and retained earnings of earlier years constitutes taxable income for the shareholders and is taxed at their level depending upon whether it is a company or an individual, resident in Austria or not. In the meantime, however, the prevailing opinion is of the view that no liquidation taxation is triggered. Based on income taxation rules, it then needs to be analysed whether assets are actually transferred in the course of the migration, in which case exit taxation would be triggered, or whether as a consequence of the migration certain assets are no longer taxable in Austria (eg, goodwill that will usually be attributed to the place of effective management) and likewise would be subject to exit taxation. In the case of migration to an EU or EEA member state, the tax can, upon request of the taxpayer, be paid in five annual instalments (or two annual instalments as regards the current assets).

Interest and dividend payments

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Interest payments to non-Austrian corporations are generally not subject to withholding tax and, therefore, are not subject to limited tax liability in Austria. Interest payments to non-Austrian individuals may be subject to Austrian withholding tax at a rate of 27.5 per cent (or 25 per cent in the case of interest payment from bank deposits and certain non-secured receivables against credit institutions) if paid by an Austrian paying agent (eg, an Austrian issuer of securities, Austrian credit institution or Austrian branch of a non-Austrian credit institution). However, if the debtor has neither its seat nor its place of business within Austria, interest payments are exempt from limited tax liability and withholding tax, even if paid by an Austrian paying agent. Relief from withholding tax may be granted under applicable tax treaties.

Since 1 January 2016, dividends paid to a non-resident are subject to a withholding tax of 27.5 per cent (or 25 per cent in the case of corporate entities as recipient). A reduction or relief from withholding tax might be available based on a tax treaty or the EU Parent-Subsidiary Directive. According to the Austrian implementation of the Directive, there is no withholding tax on dividends if:

  • the parent company has a form listed in the Directive;
  • the parent company owns directly or indirectly at least 10 per cent of the capital in the subsidiary; and
  • the shareholding has been held continuously for at least one year.

 

Given that certain documentation requirements are met, a reduction or relief can be granted at source. There is no relief at source in cases of potential tax avoidance through holding companies (namely, if the recipient is a company that does not have an active trade or business, employees and business premises). Companies can apply for a refund in that case. In the course of the refund procedure, the company must provide evidence that the interposition of the company does not constitute an abusive arrangement. As a further option, a refund of withholding tax on dividends can be claimed by a foreign corporation to the extent that the Austrian payer is not relieved from its withholding obligation, so long as the tax withheld is not creditable in the recipient’s home state under a double taxation treaty.

Tax-efficient extraction of profits

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

According to Austrian generally accepted accounting principles (GAAP), the balance sheet profit of a company can be sourced by the release of capital reserves paid in by the shareholder or by operating profits obtained by the company itself. Austrian tax law provides a different treatment for distributions of such balance sheet profits, whether they are made in the form of repayment of capital or as dividends. Repayments of capital are tax-neutral and do not trigger withholding tax. At the level of the company, such repayment of capital does not trigger any tax consequences under Austrian tax law. At the level of the shareholder, a repayment of capital is treated as a reduction of the acquisition costs or book value of the participation. Such a reduction leads to a taxable capital gain if the repaid amounts exceed the acquisition costs or book value for tax purposes of the participation.

To document the amount of capital contributions for tax purposes (which can be different from the equity according to Austrian GAAP), taxpayers must record all capital contributions in a special tax account. As long as the contributions recorded in this account cover the amount of a planned profit distribution, the management of a company has the right to decide whether a distribution to all shareholders of the company shall be treated as a taxable dividend or a tax-neutral repayment of capital under certain conditions.