Considering the strict view taken by the tax courts in recent decisions regarding the capital contribution tax on indirect shareholder contributions effected before or during reorganisations, corporations would be well advised to take a cautious approach. To reduce the tax risk, solid commercial (ie, non-tax) arguments that substantiate an obvious predominant interest of the contributing indirect shareholder (and not of the interposed direct parent) for effecting the contribution should be available and adequately recorded.
A 1% capital contribution tax will fall due on equity contributions made by a direct shareholder to an Austrian corporation. However, whether indirect shareholder contributions may trigger this 1% tax is still the subject of long-running debates with the tax authorities. Since indirect shareholder contributions are a commonly used tool before or during reorganisations (eg, for increasing the target's equity base to ensure a positive fair market value), this tax aspect is of utmost importance from a structuring perspective.
In several recent decisions, both the Supreme Tax Court and the Independent Tax Panel have addressed the issue of the capital contribution tax on indirect shareholder contributions effected around or in conjunction with corporate restructurings. The restructurings in question have generally led to the collapse of the (three-tier) group structure in such a way that the assets contributed by the indirect shareholder effectively ended up with the direct shareholder.
Based on the respective jurisprudence of the European Court of Justice (ECJ) on the interpretation of the provisions of EU Directive 2008/7/EC concerning indirect taxes on the raising of capital,(1) which must be taken into account as a result of harmonisation within Europe, the Austrian tax courts have applied a substance-over-form principle when analysing whether an indirect shareholder contribution should be attributed to the direct shareholder (even if it has been formally effected by the indirect shareholder).
In particular, if the contribution has been effected in the predominant interest of the interposed company, it will be treated as being effected by the direct shareholder and may thus trigger the capital contribution tax.(2)
In light of the above ECJ decisions, the Austrian tax authorities have taken the approach that a typical indirect shareholder contribution - without the involvement of the interposed company - does not trigger the 1% capital contribution tax. Given that any increase in value in the shares in the subsidiary triggered by a contribution is, at least to some extent, also in the interest of the interposed company, an indirect shareholder contribution should not automatically lead to the attribution of such contribution to the direct shareholder (and thereby be subject to the 1% capital contribution tax). Only a particular, almost exclusive interest of the direct shareholder in the contribution should be relevant in such cases.
The courts have taken the view that an indirect shareholder contribution effected shortly before or in conjunction with a corporate reorganisation may indicate a nexus between the contribution and the reorganisation that effectively leads to an ultimate benefit for the direct shareholder. If, in addition, other obvious facts - such as an apparent need for capital or an obligatory debt-to-equity ratio at the level of the interposed company - are eventually achieved by effecting the reorganisation (eg, where, as a result of the reorganisation, the assets contributed eventually end up at the level of the direct parent company), these facts may emphasise the outstanding interest of the interposed company in the contribution.
Such interest may lead to the formal indirect shareholder contribution being attributed to the direct shareholder for capital contribution tax purposes. Therefore, in some of the cases decided by the courts, even valid commercial (ie, non-tax) arguments for effecting the contribution (eg, ensuring a positive fair market value of the entities concerned or avoiding a prohibited repayment of capital at the level of the transferring entity) did not prevent the 1% capital contribution tax from falling due.
(1) For example, Energie Steiermark Holding AG (C-339/99); Develop Baudurchführungs- und Stadtentwicklungs GmbH (C-71/00); Solida Raiffeisen Immobilien Leasing GmbH, Tech Gate Vienna Wissenschafts- und Technologiepark GmbH (C-138/00).
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