Private Foundations: New standpoint of the Austrian Supreme Administrative Court on the transfer of hidden reserves pursuant to section 13 para. 4 KStG (Austrian Corporate Income Tax Act)
As a general rule, section 13 para. 4 KStG permits Austrian private foundations to carry over hidden reserves from the sale of investments (in which the foundation or its legal predecessor held a share of at least 1% within the last five years) to substitute investments. These substitute investments must involve the acquisition of a share of more than 10% of an entity (“substitute acquisition”).
A new Austrian Supreme Administrative Court case clarified whether it is also considered such a preferential substitute acquisition if it takes the form of an ordinary capital increase for a company in which the foundation already holds a 100% share.
Previous position of the Austrian tax authorities
Pursuant to StiftRL margin note 117, a capital increase (including premium) should generally be considered a purchase of shares for the purposes of section 13 para. 4 KStG. In this example the tax authorities seem to assume that the transfer of hidden reserves is likewise to be applied when the foundation is already the sole shareholder of this company.
New Austrian Supreme Administrative Court ruling
In its verdict of 17 November 2022, Ra 2021/15/0053, however, the Supreme Administrative Court denied a private foundation the transfer of hidden reserves pursuant to section 13 para. 4 KStG, because a capital increase for what is already a 100% subsidiary does not constitute a legitimate substitute acquisition. The acquisition of new shares amounting to at least 10% of a subsidiary which is already 100% owned is not possible. This contradicts the standpoint previously taken by the tax authorities.
However, in the legal assessment, the Supreme Administrative Court notes that a legitimate substitute acquisition may be achieved through the formation of a new subsidiary. A legitimate substitute acquisition may likewise be achieved with an ordinary capital increase (to a company not already 100% owned), if the private foundation in this way acquires at least an additional 10% share of the entity.
Practical information
The Supreme Administrative Court thus determined that a successful transfer of hidden reserves pursuant to section 13 para. 4 KStG depends on the acquisition of “new” shares amounting to at least 10%. If the foundation is already the sole shareholder of the company or holds at least 90%, such an acquisition of “new” shares is no longer possible.
Since the Supreme Administrative Court decision can also impact already realised cases which were handled based on the previously taken standpoint of the tax authorities, in case of an external tax audit, special attention needs to be paid to procedural aspects.
The Austrian Supreme Administrative Court expressly allows the forming of a new subsidiary as a legitimate substitute acquisition, thus enabling potential structuring options.
