The Administrative High Court has recently decided on questions of the valuation of shares in non-profit limited liability companies and the admissibility of partial write-downs by their shareholders. Moreover, the Administrative High Court dealt with some fundamental questions in connection with tax-privileged (non-profit) legal entities (Administrative High Court 10. June 2021, Ro 2019/15/0007).
A holding company (owned by a religious order) held 100% of the shares in two non-profit limited liability companies, which were operating hospitals. The holding company also provided management services to the two companies which constantly generated losses. Due to the loss situation of the companies, the holding company wanted to partially write-down the investments and offset these write-downs with taxable income (resulting from its function as the parent company of a tax group with other for-profit subsidiaries). The tax office and later also the Tax Appeals Court did not accept the partial write-downs on the participations in the non-profit subsidiaries.
In its decision, the Administrative High Court addressed several fundamental questions:
The tax office did not accept the write-down, inter alia, with reference to the lack of the business asset status of the investments. The Administrative High Court stated that there is in any case a relevant factual connection between the provision of services for consideration (management services) and the shareholdings and that the shareholdings must therefore be regarded as necessary business assets of the holding company. According to the Administrative High Court, however, even in the absence of services rendered by the holding company to its subsidiaries the shares could at least be qualified as arbitrary business assets, so that in this case the status as business assets would also be achieved.
The Administrative High Court also rejected the qualification of the participations as a hobby-activities (“Liebhaberei”) which was argued by the tax office. In the opinion of the Administrative High Court, the management services carried out by the holding company and the shareholdings must be viewed together. An isolated view of the (profitable) management services on the one hand and the (profitless) shareholdings on the other hand is not permissible. Rather, the overall activity of the holding company must be considered.
Finally, the Administrative High Court commented on the question of the valuation of the shares in a non-profit limited liability company. Preliminary, it must be stated that non-profit limited liability companies must not be profit-oriented due to the tax requirements for non-profit legal entities on the one hand and on the other hand they are not allowed to make profit distributions to their shareholders. The methods usually used for the valuation of the shares in limited liability companies, which focus on the future cash inflows resulting from the shares (profit distributions), can therefore not be applied to non-profit limited liability companies. Instead, according to the Administrative High Court, the so-called substance value or reconstruction value can be used. This is the amount that would have to be spent on (re-)establishing the assets of the subsidiary. In the present case, these were the current replacement costs of the assets of the hospitals operated by the subsidiaries (i.e. in particular the current construction prices for the buildings owned by the companies and the current market prices of the medical equipment). A potential interest of competing market participants in the shares in the company must also be considered in the valuation. In any case, a mere reference to the sum of the subsidiary's assets at book values (less liabilities) or a reference to the net loss for the year does not constitute adequate proof of an impairment of the shares.
The statements of the Administrative High Court are generally to be welcomed and offer an indication of the question of the valuation of shares in non-profit limited liability companies, which has not yet been conclusively clarified.
Christoph Hofer ist Director in der Steuerberatung bei Deloitte in Salzburg. Als Steuerberater liegen seine Schwerpunkte im Bereich Steuer-Compliance von Kapitalgesellschaften. Weitere Tätigkeitsschwerpunkte liegen im Bereich des steuerlichen Gemeinnützigkeitsrechts und der Vereinsbesteuerung. Er verfügt über Erfahrung in der Beratung von Familienunternehmen und Vereinen.