Austrian companies may carry forward their losses for an unlimited period of time and offset them against current profits. However, the losses carried forward of a company is foregone once the latter has lost its economic identity.
Hence, losses carried forward cannot be maintained if the company is not able to pass a loss limitation test, which would be the case if a (i) significant change in the shareholder structure on a remunerated basis along with a significant change in the (ii) organizational and (iii) economic structure of a company takes place. All three structural changes must be fulfilled cumulatively.
In this case, the shares in R-GmbH (existing loss carryforwards in the amount of approximately EUR 850.000) were sold, which until then had predominantly leased its existing business assets to an operationally active partnership (W-OG), which operated a medical practice. Simultaneously with the sale of the shares, W-OG was contributed to R-GmbH and thus the partnership’s business accrued to R-GmbH. Since then, R-GmbH has carried out an operational activity (running a medical practice) instead of an asset-managing activity (renting). This led to R-GmbH using the assets it already owned (which had been rented to W-OG) for its own operations.
Since both the sole shareholder and the sole managing director of R-GmbH changed, there was no question whether a significant change in the shareholder as well as the organizational structure took place. It was, therefore, only necessary to clarify whether there has also been a significant change in the economic structure.
According to the previous decisions of the Administrative High Court, a change in the economic structure requires a change or a significant expansion of the corporate purpose. In the present case, the assets of R-GmbH did not change significantly. However, the operational use of the assets, which had before been used exclusively for rental purposes, did result in a change in the corporate purpose. Thus, in the opinion of the Administrative High Court, there has also been a significant change in the economic structure and, therefore, the loss limitation test cannot be passed. As a consequence, the loss carryforwards of approximately EUR 850.000 are forgone at the time of the disposal of the shares in R-GmbH and cannot be offset with futures profits.
In 2003 A-GmbH (existing loss carryforwards in the amount of approximately EUR 100.000) finally discontinued its operational business activity (internet-broker) with the withdrawal of the corresponding concession. Moreover, in 2004, the parent company (EB-GmbH) sold its shares in A-GmbH to the grandparent company (Z-AG). Likewise, A-GmbH founded a subsidiary (IB-GmbH). Z-AG contributed two valuable shareholdings to IB-GmbH and from 2005 onwards a group of companies was founded with A-GmbH as the group parent and IB-GmbH as a group member.
In addition to the two previous managing directors of A-GmbH, a new managing director was appointed who had previously been employed by Z-AG and was responsible for investment management there.
The Administrative High Court had no doubts about the change in the shareholder structure. This results from the transfer of the shares in A-GmbH on a remunerated basis to Z-GmbH. Hence, there is no "see-through" consideration with regard to a (grand-) parent company. The only thing that matters is the transfer of the direct company shares.
The change of the economic structure requires, as explained above, a change or a significant expansion of the corporate purpose. In the present case, the activity of A-GmbH changed from an operational activity (internet broker) to an asset management activity (investment management). A-GmbH had disposed of the assets used for the former operative activity. Its new assets consisted of valuable participations. Here, it does not matter whether the change in the economic structure occurred with the previous owner (EB-GmbH) or the subsequent owner (Z-AG) if there is a planned connection between the individual structural changes. Thus, based on the decision of the Administrative High Court, a change of the economic structure took place.
In the case at hand, however, it remains contested whether the appointment of the third managing director constitutes a change in the organizational structure. Such a change is realized if all, or the vast majority of the members of the management are replaced. However, if a position on the board is only formally retained, this cannot prevent the effects of the anti-loss trafficking rules.
In the present case, according to the Administrative High Court, it is crucial whether there has been a change in the actual management of the company that is significant from an economic point of view. The decisive factor is not necessarily whether, for example, the previous managing directors signed the annual financial statements based on the formally existing collective power of representation, but whether they also actively participated in the management and the formation of the will. However, this could not be conclusively assessed from the findings of the Tax Appeals Court, which ruled at first instance. For this reason, the Administrative High Court overturned the Tax Appeals Court’s decision. Consequently, the Tax Appeals Court must ascertain the facts in question in a continued proceeding and can only then assess whether there has been a change in the organizational structure.
A change in the shareholder structure results from the transfer of ownership of the shares on a remunerated basis. The fact that the influence under company law in a group via the head of the group does not change in the case of intra-group transfers is irrelevant. It is only the transfer of the direct shares in the company that matters.
A change in the economic structure occurs when there is a change or a significant expansion of the corporate purpose. A change in the corporate purpose is given, among other things, if there is a change in the use of the assets from pure asset management to operational use or vice versa. Furthermore, it is irrelevant whether the change in the economic structure occurs with the old or the new shareholder if there is a planned connection between the individual structural changes. In any case, the mere termination of an economic entity does not yet imply a significant change in the economic structure.
For the question of a change in the organizational structure, it is decisive whether all or the vast majority of the members of the management are replaced. Furthermore, a mere formal retention of the position of a managing director can also lead to the fulfillment of the anti-loss trafficking rules. In the opinion of the Administrative High Court, it is primarily a matter of whether the previous managing directors are de facto actively involved in the management and the formation of wills.
Besides, attention must always be paid to the fact that the economic substance test only applies to the overall economic structure of the target (“overall picture”). Furthermore, not all of the above-mentioned rules need to be fulfilled equally strong. The chronological order of the structural changes is not important. The decisive factor is rather that there is a planned connection between the individual structural changes.
Katharina Luka ist Steuerberaterin bei Deloitte Wien. Ihre Tätigkeitsschwerpunkte liegen insbesondere in den Bereichen Körperschaftsteuer, internationales Steuerrecht und in der Umgründungsberatung. Sie ist zudem als Fachautorin und Fachvortragende tätig.