High court desicion: No final loss utilization for shares in case of a liquidation of non-EU/EEA tax group member
According to the Austrian Administrative Supreme Cout (“VwGH”) the Austrian tax group regime is full set of rules, which prevails as lex specialis over the general rule for the loss utilization. Therefore the concurrent application of the general final loss utilization rules for shares were rejected by the recent case law in case of non-EU/EEA setup.
Facts and circumstances
The parent of the tax group holds 100% of the shares in a South Korean (third country, non-EU/EEA country) member of the tax group. During the time it formed part of the tax group, write-downs of the shares in this group member in the amount of EUR 6.9 million were not deductible for tax purposes. In the same time period, the group parent has utilised “Korean” losses (foreign losses to be adjusted to Austrian tax standards) in the amount of EUR 6.2 million through the group tax system. In 2016, the Korean member of the tax group was finally liquidated generating profit.
The group taxation regime provides that, previously utilised foreign losses are subject to tax effective recapture in Austria. This recaptured amount (in this case EUR 6.2 million) may be reduced by the amount of write-downs under tax law which have been non-deductible for tax purposes during the group taxation. Such reduction of the amount to be recaptured cannot turn negative and create a tax-deductible loss, i.e. is limited with zero.
Outside the tax group, the final loss utilization of shares provides that final losses can be tax deductible maximal in the amount of the original acquisition costs of that share.
The taxpayer was of the view that both rules are to be applied concurrently and claimed the recapture amount to be zero and the additional final loss of EUR 0.7 million to be recognized as final loss in a share investment.
Ruling of the VwGH
In the appeal, the VwGH had to decide whether the two systems can be applied concurrently or if one system prevails over the other. The latter should be correct according to the VwGH, i.e. where the original acquisition costs were higher than the amount to be recaptured from prior utilized foreign losses, the final loss utilization of shares does not apply. In the case at hand, the EUR 0.7 million are not tax deductible. Any parallel application the final loss utilization mechanism of the Austrian corporate income tax law has been rejected: The group taxation is a special norm that is prioritised over the general system.
According to the VwGH, the legislator shows no intention for an additional tax deductibility of an exceeding difference up to the original investment in the shares within the Austrian tax group regime.
Initial implications in practice
As the case at hand was no EU/EEA case, existing JCEU case law on final losses has not been not taken into account in the present VwGH ruling. In case the liquidated group member is domiciled in the EU or EEA, it should be verified whether under EU law it is required to allow for a deduction of final losses.
As the Austrian tax group regime is an optional tax tool, especially if the minimum duration has been met, a simple opt-out form the Austrian tax group of the foreign company to be liquidated might be a simple way to switch into the general final loss utilization rules for shares. Details of such an opt-out from the Austrian tax group and any timing consideration should be analyzed upfront. Happy to support you in this regard.
