ADMINISTRATIVE HIGH COURT: CONTRIBUTION OF A PURELY ACTIVITY-BASED ONE-PERSON COMPANY

Overview

A (tax-neutral) contribution pursuant to Art III Reorganisation Tax Act (UmgrStG) is possible if a business is effectively transferred to the acquiring corporation. Decisive criteria for an effective transfer of the business are (i) the takeover of the essential business assets by the acquiring corporation as well as (ii) the provision of the (at least abstract) possibility to continue the business activity. In its decision from December 17, 2020 (Ra 2019/15/0096), the Austrian Administrative High Court (VwGH) dealt with the question whether a contribution of sole proprietorships with purely activity-related services, in the present case a management consultancy, is possible.

Facts

The complainant, a management consultant acting as a sole proprietor, contributed his business to the already existing X-GmbH with retroactive effect on January 1, 2013. The sole activity of the contributed business was the provision of consultancy services for a major client. In course of the contribution, it was verbally agreed that the complainant would continue to provide the consultancy services, however, now through X-GmbH with him acting as managing director as well.

The tax audit carried out in 2016 denied the existence of a contribution pursuant to Art III UmgrStG and attributed the income earned by X-GmbH in the years in dispute (2013 to 2015) to the complainant personally. This was justified by the fact that X-GmbH did not obtain an enforceable claim to the complainant's work as the sole provider of services. Thus, the complainant's personal skills remained as his essential business asset which could not be transferred due to the lack of separability.

In contrast to the tax office, the Tax Appeals Court (BFG) did not deny that opinion. In principle the business could be contributed. The Court rather objected to the fact that the managing director's contract was not at arm's length. According to the reasoning of the court, an outside corporation would insist on the conclusion of a written contract with the complainant. Moreover, they argued that the agreed managing director's remuneration was not appropriate.

Opinion of the High Administrative Court

The Administrative Court overturned the decision of the Tax Appeals Court. The ability to contribute a business cannot be denied solely based on the fact that the contributing entrepreneur is the "sole service provider". This is because consulting services can generally also be provided by other persons in a similar manner.

In addition, the Court emphasized that a managing director's contract which is not at arm’s length does not automatically lead to the invalidity of a contribution agreement. Whether or not the contributor is available to the acquiring corporation as a managing director is not a prerequisite for the effectiveness of a contribution of a business.

To whom the income from the management consultancy is actually attributable is independent of the tax effectiveness of the contribution. Rather, the outward appearance of things, such as acting on behalf of the acquiring company, would be the decisive factor.

Conclusion

Even purely activity-related businesses with only one service provider are available to tax-neutral contributions pursuant to Art III UmgrStG. Furthermore, the following service relationships (such as a managing director's contract) and their customary nature are insignificant for the effectiveness of the contribution.

Finally, for the attribution of income it does not matter whether a contribution is recognized for tax purposes. Rather, the external appearance, such as the provision of services on behalf of the acquiring company, must be taken into account.

Practical note

Another prerequisite for a tax-neutral contribution pursuant to Art III UmgrStG is that the assets which will be contributed need to have a positive market value. It should be noted, however, that goodwill consisting only of the personal reputation and name recognition of a sole proprietor cannot be transferred. Consequently, goodwill cannot be considered when determining the (positive) market value of the assets to be contributed.