Austria - Tax regulations for cross-border divisions published

A draft Tax Amendment Act 2023 published by Austria’s Federal Ministry of Finance on 21 April 2023 includes the eagerly awaited tax measures for cross-border reorganisations. These rules are necessary as part of Austria’s implementation of the EU Mobility Directive (Directive 2019/2121).

The Mobility Directive is designed to improve cross-border mobility for companies, provide a harmonised framework for cross-border conversions, mergers and divisions, and improve the EU cross-border merger rules in general. The Mobility Directive amended a 2017 directive, which provided rules on cross-border mergers of limited liability companies; because the 2017 directive did not address cross-border conversions or divisions, it created uncertainty and, in some cases, inconsistent treatment among the EU member states. Among other things, the Mobility Directive establishes steps to carry out cross-border divisions that involve the formation of new companies and amends the rules on cross-border mergers to align them with the new rules on divisions. The Mobility Directive became effective on 1 January 2020 and was required to be transposed into the domestic laws of the 27 EU member states by 31 January 2023.

The implementation of the Mobility Directive in Austrian domestic law will be delayed until the enactment of the Austrian EU Company Reorganisation Act (EU-UmgrG), the latter of which requires changes to Austria’s Reorganisation Tax Act (RTA). Although Austria’s general income tax rules apply to conversions of companies, and no significant changes will be made to the tax treatment of cross-border mergers, the proposed rules on cross-border divisions in the RTA is a significant change.

Cross-border divisions

Currently, the only divisions that are covered by the RTA in a cross-border context are foreign divisions (i.e., divisions of foreign corporations based on foreign rules that are comparable to the Austrian rules).

Due to the corporate law measures in the EU Reorganisation Act, the Austrian RTA will, in the future, apply to both partial and full divisions, but only to cross-border divisions that involve the formation of new companies. Therefore, the draft Tax Amendment Act 2023 would add to the RTA provisions regarding a possible restriction of Austria's right to tax (in the case of a division where the new company is formed outside Austria), as well as provisions regarding a possible creation of the Austria’s right to tax (in the case of a division where the new company is formed in Austria). The new provisions are largely based on the existing tax provisions on cross-border mergers.

Accordingly, the tax provisions in the RTA regarding cross-border divisions would be applicable only to the extent there is no restriction on Austria’s right to tax hidden reserves and any goodwill. If there is such a restriction, the instalment payment concept would be applied (i.e., a request can be made to pay the tax liability in instalments).

Cross-border separation

A cross-border separation within the meaning of the EU Mobility Directive is a transaction under which a company transfers part of its assets to one or more newly formed companies in return for the granting of shares to the transferring company (as opposed to the granting of shares to the shareholders of the transferring company). From an Austrian perspective, a cross-border separation will offer new structuring possibilities as a taxable contribution under “universal legal succession.” In the future, separations within the meaning of the EU Reorganisation Act will be treated as contributions for tax purposes (under company law, however, they would continue to be treated as divisions).

To meet the requirements for a contribution under the Austrian RTA, qualified assets within the meaning of the RTA (independent businesses, branches of activity or qualified capital shares) must be transferred and other formal and substantive requirements must be met. If these requirements are not met, the cross-border separation would be considered a "crashed" contribution for tax purposes, which means that the special rules in the Austrian RTA for a tax-neutral contribution would not be applicable; instead, the general income tax law would apply, which may result in a taxable contribution.

One in effect, the regulations will apply retroactively to reorganisations taking place after 31 January 2023.

Karl Stückler
Magdalena Holzer
BDO in Austria

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