Spin-off: No separation of VAT liabilities

Overview

The Tax Appeals Court ruled in its decision dated 13 January 2022, RV/4100363/2018, that a separation of VAT liabilities from the assets, which caused the VAT liabilities in course of a spin-off is not possible.

Facts of the case

The complainant spun-off a part of its business ("non-core" area). This was done retroactively for the spin-off date 31 December 2011, the spin-off and takeover agreement dated from 10 August 2012. The assets allocated to the absorbing corporation were defined in the transfer balance sheet. In addition, certain liabilities, including legal disputes mentioned in an annex, were explicitly transferred to the absorbing corporation. Further, a rule of doubt was agreed on in the spin-off and takeover agreement, according to which all burdens (obligations, liabilities, liabilities) that were not explicitly retained by the complainant and its "core”-business were assigned to the "non-core” business and thus were transferred to the absorbing corporation.

The economic background of this spin-off was apparently that the complainant was to be sold to a third party after the spin-off and the acquirer wanted to only acquire the remaining "core"-business but without the “non-core”-business and any other unknown liabilities. Any surprising liabilities caused in years prior to the acquisition should not affect the acquired corporation.

In 2017, a tax audit was carried out for VAT for the years 2010 to 2014 and an inspection (“Nachschau”) for the years 2015 to 2016. The tax audit found that an incorrect input tax key was used. For the years 2010 and 2011 VAT and ancillary claims were assessed.

An appeal was filed against both VAT assessments. It was argued that the spin-off and takeover agreement did not provide for an explicit provision of the allocation of tax liabilities that were already caused in principle at the time of the spin-off but were not recognized in the balance sheet yet. In the absence of a specific allocation of tax liabilities, the contractual rule of doubt should apply. Therefore, such tax liabilities were assigned to the absorbing corporation. Accordingly, the disputed VAT assessments should have been issued to the absorbing corporation.

Decision of the Tax Appeals Court

The appeal was dismissed by the Tax Appeals Court. In the decision, it was not questioned that under civil law in the spin-off and takeover agreement the tax liabilities were allocated to the absorbing corporation due to the general contractual rule for cases of doubt. However, these VAT liabilities, which were assessed in the course of the external audit, resulted from the "core"-business which had not been transferred and remained with the complainant. In the opinion of the Tax Appeals Court an assignment of VAT liabilities that deviates from the assets causing these liabilities is not possible for tax purposes and therefore cannot be agreed on by the parties of the spin-off and takeover agreement.

The Tax Appeals Court argued that pursuant to Sec 38 para 3 Austrian Reorganization Tax Act, absorbing corporations enter directly into the legal status of the transferring corporation regarding VAT for transferred business units. This provision means on the contrary that an absorbing corporation does not enter into the legal status of an entrepreneur within the meaning of the VAT Act in case the business, from which the status as entrepreneur results, was not transferred. The tax liabilities in question were related to the "core"-business which remained with the complainant. Consequently, the complainant was correctly regarded as the addressee of the tax assessments by the tax office.

Therefore, VAT liabilities cannot be transferred to third parties with the effect that the third party becomes liable for the payment of VAT towards the tax office and thus become the addressee of the assessment. It is only possible to agree between the parties that one party bears the financial burden of a tax payment.

An ordinary appeal to the Administrative High Court was not allowed.

Conclusion

In the case at hand tax liabilities were assigned to the absorbing corporation by the rule of doubt which was agreed on in the spin-off and takeover agreement. However, the Tax Appeals Court denied that the separation of the tax liability from the assets causing the tax liability is possible, at least in the area of VAT.

However, it is still possible to agree in the spin-off and takeover agreement that one party (this can also be a party not having the assets causing the tax liability) bears the financial burden from a tax liability in the internal relationship between the contractual parties. Such a takeover of financial burdens however does not affect the status of addressee of the tax assessment but results in a compensation claim between the parties.