The draft for the Tax Amendment Act 2015 published today [19 October 2015] proposes an amendment of existing exit taxation rules that would significantly tighten these rules, which eventually lead to the taxation of hidden reserves in assets transferred.
Currently, Austrian tax law provides for the exit taxation of hidden reserves embedded in assets in case Austria's taxation right with respect to these assets is restricted or lost, eg on the occasion of the taxpayer's moving outside of Austria, a transfer of an entire business or specific assets outside of Austria, or any other circumstances leading to the loss of such domestic taxation right. Nevertheless, in case Austria's taxation right is lost or restricted vis-à-vis an EC or EEA member state with comprehensive administrative and enforcement assistance, the taxpayer is entitled to opt for a tax deferral. If such option is exercised, the amount of hidden reserves in the assets transferred will be determined by way of a decree issued by the competent tax authority upon the time of the assets' transfer. However, the obligation to pay the amount of tax due on such hidden reserves is postponed until a realization event (eg sale, transfer outside the EC/EEA, etc) with respect to the assets transferred occurs. If such realization event occurs after the expiry of the obligatory statute of limitation of ten years, the taxpayer will not be obliged to pay the amount of tax due.
These rules apply irrespective of whether the assets transferred are part of the taxpayer's business assets or their private assets (with respect to the latter, restricted to financial assets). A special rule currently exists for self-developed intangibles transferred outside of Austria in order to avoid a double dip of expenses.
Proposed new rule
In light of the ECJ jurisprudence, the Austrian legislator now aims to significantly tighten the country's exit taxation rules by replacing the existing tax deferral concept with an instalment regime.
Under the proposed new regime, the option for a tax deferral will be replaced by an option to apply for the payment of instalments in case of business assets transferred from Austria to an EC or EEA member state with comprehensive administrative and enforcement proceedings. The criteria pursuant to which such option will be available remain the same (eg transfer to another business of the same taxpayer, transfer of an entire business, etc). With regard to assets that are part of the business' fixed assets, the instalment period amounts to seven years, while it is two years for current assets. In case a realization event (eg sale, transfer outside of EC/EEA member states, etc) with respect to the assets transferred takes place for which the option for payment in instalments has been exercised, the entire outstanding amount of tax will become due. The taxpayer will be obliged to notify the competent Austrian tax authority of such realization event within three months.
In case of the transfer of financial assets which are part of the non-business assets of an individual taxpayer, the current deferral concept will remain applicable; however, these will be restricted only to the actual move of an individual person outside of Austria, as well as the cost-free transfer of financial assets (eg by way of a gift or a transfermortis causa) to another individual. In all other scenarios where Austria's taxation right with respect to the financial assets is restricted or lost vis-à-vis an EC or EEA member state with comprehensive administrative and enforcement assistance, only the payment of the amount of Austrian income tax due on the hidden reserves in instalments over a period of seven years is feasible.
In order to avoid any potential bypassing of these new rules, the instalment concept is equivalently also proposed to apply to the transfer of assets in the course of reorganisations governed by the Austrian Reorganisation Tax Act, with a seven years instalment period generally being applicable.
The proposed new rules are expected to enter into force as of 1 January 2016. The proposed changes for the transfer of assets occurring in the course of a reorganisation governed by the Austrian Reorganisation Tax Act shall apply to reorganisations resolved on or concluded by way of agreement after 31 December 2015. Any transfer of assets prior to these dates will therefore still be available for application of the deferral concept. In order to avoid the application of the new regime, rapid steps prior to year's end are recommended.
Statute of limitation
As noted above, in case of the application of the tax deferral concept, no income tax on hidden reserves on assets transferred outside of Austria will have to be paid in case a realization event occurs after expiry of the ten years statute of limitation. In order to avoid such scenario, the legislator has now proposed amending the wording of the ten years statute of limitation rule in such a way as to ensure that the ten years statute of limitation period only starts at that point in time in which the realization event actually occurs. Therefore, under the proposed new rule, even if the realization event occurs after ten years from the underlying asset's transfer outside of Austria, the taxpayer will still be obliged to pay the amount of Austrian income tax on the hidden reserve as determined upon the asset's transfer.
Such amendment shall enter into force as of 1 January 2016 and shall also capture scenarios for which the deferral concept was applied in the past (eg covering any transfer of assets occurring after 31 December 2005).