In its decision of 19 May 2021 (RV/7100005/2012), the Tax Appeals Court had to deal with the question of the extent to which debt financing costs in connection with a property partially contributed to a GmbH in accordance with Art III of the Reorganization Tax Act (RTA) are deductible as income-related expenses if the credit attributable to this contribution in kind is retained.
By contribution agreement dated on 28 September 2004, the operation of the taxpayer's sole proprietorship was transferred retroactively as of 31 December 2003 to a GmbH whose sole shareholder is the taxpayer. Among other things, a property previously held as private asset was divided in the course of the contribution procedure, whereby a previously unused subarea (44 %) was retroactively deposited and transferred to the GmbH on the transfer date. The part remaining in private assets and already rented out (56 %) continued to be used to generate income from letting and leasing. The taxpayer had originally acquired the entire property in 2002 and financed it by two loans. These loan agreements related to the entire undivided property but remained entirely in private assets even after the contribution of the business in 2004.
In connection with these loan agreements, the taxpayer claimed all the financing costs as tax deductible income-related expenses in the years 2007 to 2009 in determining the income from letting and leasing. In 2007, however, only 56 % of the financing costs were recognized as income-related costs (corresponding to the amount of the rent).
The tax office issued new income tax assessments in which the debt financing costs are only considered proportionately to the extent of 56 %, since 44 % of the building has been deposited and the depreciation is also factored in those costs. The interest part of 44 % should, therefore, be taken into account in the case of the GmbH. An appeal was filed against those assessments, requesting that the interest should be recognized entirely as income-related expenses.
In its decision, the Tax Appeals Court shared the views of the tax office and, therefore, dismissed the appeal: The financing costs of 44 % are related directly and economically to the generation of investment income to which the special tax rate applies. This direct connection is presumed because the contribution of the land increased the value of the capital assets in the form of the shares in the acquiring GmbH. A temporal discrepancy between borrowing and the creation of capital assets, as in the present case, is harmless. The financing costs are therefore not deductible for that part.
Only the part of the debt financing costs that relates to the part of the property, which is still in the taxpayer's private assets and, therefore, is related to income from renting and leasing (56 %) continues to be deductible as income-related expenses.
If, in the course of a contribution of a business, a part of a property previously in private assets is transferred to a GmbH, but the credit attributable to this contribution is retained, this pro rata loan is related to the capital shares in the acquiring GmbH. The debt financing costs associated with the loan are therefore not deductible on a pro rata basis.
Debt financing costs associated with the unrented portion of the property, however, are still potentially deductible as business expenses.
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.