Austrian Supreme Administrative Court (VwGH) on seamless transition in cases of mergers within company groups

In principle, section 9 para. 5 Austrian Corporate Income Tax Act (KStG) provides that a merger within the company group does not result in the merging company exiting the company group or in other changes to the company group. The Austrian Supreme Administrative Court addressed a special situation in its decision of 19 October 2022, Ro 2022/15/0032 (German only): The absorbing company was  a wholly owned subsidiary of the group parent but became a member of the company group only as of the day following the effective date of the merger.

Circumstances

A GmbH had been a member of a company group since the fiscal year 2017. By merger agreement dated 26 September 2018, the company was merged with retrospective effect with B GmbH as of 31 December 2017.

Even though B GmbH had already been wholly owned by the group parent long-term, the company was only included in the company group as of 1 January 2018 – meaning as of the day following the effective date of the merger. The tax group notice was issued 7 March 2018.

Followingly, the competent tax authority assumed that A GmbH was merged (with retrospective effect) with a company outside the company group (B GmbH), since B GmbH was included in the company group only as of 2018 and had not been a member of the company group in 2017.

Consequently, according to the Austrian tax authority, A GmbH should leave the company group with retrospective effect and be individually taxed for 2017, since the minimum period for group membership was not met.

Ruling of the Austrian Supreme Administrative Court

Transfers within company groups are regulated by section 9 para. 5 KStG, according to which transfers of all assets with retrospective effect regarding taxation are not considered changes to the preconditions of the company group.

Therefore, it is under dispute whether the merger as of 31 December 2017 to a company which was a member of the company group only as of 1 January 2018, qualifies as “transfer of assets within the company group”.

According to the Austrian Supreme Administrative Court, reorganisations are considered as completed after expiry of the agreed upon date. The merger dating 31 December 2017 therefore becomes effective as of 1 January 2018.

Therefore, the transferred assets are subject to income tax at the absorbing entity only as of the day following the effective date of the merger (thus 1 January 2018).

If the absorbing company becomes a member of the group as of the day following the effective date of the merger, the merger nevertheless qualifies as transfer of assets within a group and does not result in the absorbing company exiting the group pursuant to section 9 KStG.

According to the Austrian Supreme Administrative Court (VwGH), it was decisive that

• • • B GmbH was a financially sufficiently associated company that could be included in the group already as of 2018 (irrespective of the merger) and
    • was already member of the group at the time of the conclusion of the merger agreement.

Summary / Implications in practice

If the effective date of a merger corresponds to the day prior to the integration of the absorbing company into the group, this matter qualifies as “seamless” group membership of the assigning group member.

This neither results in an exit nor in transaction reversals in cases of mergers occurring within the minimum duration period.

Pursuant to the decision of the Austrian Supreme Administrative Court, temporal matters need to be considered as well. In particular, the time criteria set by the Austrian Supreme Administrative Court regarding the financial association and timely integration into the company group need to be observed.

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Authors: Yasmin Lawson / Michael Wenzl