Austrian Tax Court (BFG) on liquidation of a foreign member of a tax group – Use of final losses restricted

For the first time, in its decision of 7 October 2022, RV/7101680/2022, an Austrian Tax Court had the opportunity to look into the relation between section 9 para. 6 subsec. 7 Austrian Corporate Income Tax Act (KStG) (reduction of subsequent taxation in the event of liquidation) and section 10 para. 3 KStG (assertion of partial write-downs not yet utilised for tax purposes) as regards the question of the utilisation of liquidation losses of foreign members of a tax group. The ordinary review to the Austrian Supreme Administrative Court has already been filed.

Circumstances

The parent of the tax group holds 100% of the shares in a South Korean (foreign) member of the tax group. During the time it was part of the tax group, the parent of the tax group (for the investment in the member of the tax group) incurred partial write-downs in the amount of EUR 6.9 million, which were not deductible for tax purposes. At the same time, the parent of the tax group utilised foreign losses in the amount of EUR 6.2 million via group taxation. In 2016, the South Korean member of the tax group was finally liquidated. In the course of this, according to the complainant, the following consequences occurred:

• • When a foreign member of a tax group is liquidated, previously utilised foreign losses are subject to subsequent taxation in Austria. This amount of subsequent taxation (in this case EUR 6.2 million) may be reduced by the amount of partial write-downs not deducted for tax purposes pursuant to section 9 para. 6 subsec. 7 KStG. In the present case, it was recognised that a reduction to zero was permissible.
  • The complainant claimed the additional partial write-downs (amounting to EUR 700k) as final losses (endgültige Vermögensverluste) within the meaning of section 10 para. 3 KStG. This was a matter in dispute.

Decision of the Austrian Tax Court

The Austrian Tax Court therefore had to decide whether partial write-downs that were originally tax-neutral and exceed the amount of subsequent taxation – i.e. can no longer be recognized for tax purposes pursuant to section 9 KStG – may be within the scope of section 10 para. 3 KStG. Section 10 para. 3 KStG generally regulates the recognition of final losses incurred abroad for international cross-holdings and provides that these can be recognized in full in Austria, affecting profit.

The court initially rejected the analogous application of section 10 para. 3 KStG to such constellations, as it did not recognise the existence of an unplanned gap by referring to the legislative materials.

In a second step, the Austrian Tax Court dealt with the submission that the applicability of section 9 KStG ends as soon as the recognisable amount has been reduced to zero. Any surplus would then be within the scope of section 10 para. 3 KStG. The court was not convinced by this argument either: In the view of the court, section 9 KStG is a closed system and the parallel application of section 10 KStG therefore not possible – as confirmed by the intention of the legislator.

Summary / Implications in practice

The question of parallel application of section 10 para. 3 and section 9 para. 6 subsec. 7 KStG is disputed in literature. Now, for the first time, a court has ruled on the matter.

According to the Austrian Tax Court, partial write-downs made by foreign members of a tax group that were originally tax-neutral can only be taken into account when offset against subsequent taxation amounts. Therefore, if these partial write-downs exceed the amount of subsequent taxation, they are lost without being taken into account. An assertion as actual and final losses within the meaning of section 10 para. 3 KStG is ruled out.

Since a review has been filed, the decision of the Austrian Supreme Administrative Court (VwGH) is eagerly awaited.

Tax risks arising from the liquidation of a foreign member of a tax group as a result of this decision could be prevented by suitable tax structuring. We are happy to support you in designing and implementing such measures.

Authors: Yasmin Lawson / Michael Wenzl