Global Tax Alert | 17 April 2014

Austrian Administrative High Court on interest and goodwill amortization

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This Alert summarizes two recent decisions by the Austrian Administrative High Court addressing (i) the definition of interest and deductible financing costs, and (ii) the goodwill amortization in the context of the EU principles of freedom of establishment and State Aid.

Scope of “interest” deduction

Under Art. 11/1/4 of the Austrian Corporate Income Tax (CIT) Act, interest paid on debt to finance the acquisition of participations has been tax deductible since 2005 (limited to third party acquisitions as of 2011). The Austrian tax authorities are of the opinion1 that the deductibility is limited to interest in the narrow sense of the word and that other debt financing costs (e.g., service fees, stamp duties, etc.) are not tax deductible.

In its ruling of 16 November 2011,2 the Independent Tax Senate (ITS) disagreed and defined interest in the context of Art. 11/1/4 Austrian CIT Act to include any costs incurred for the allocation and utilization of capital. Hence, according to the ITS, a wide range of debt financing costs is tax deductible (e.g., commitment fees and other payments to the creditor and/or third parties such as brokers, notaries, and lawyers).

The Austrian tax authorities filed an appeal with the Austrian Administrative High Court. In its recent ruling dated 27 February 2014,3 the Court agreed with the ITS and defined interest in a broad sense. The Austrian Administrative High Court held that interest under Art. 11/1/4 Austrian CIT Act covers all payments made by the borrower to the creditor as consideration for the allocation and utilization of capital. Hence, commitment fees paid to the creditor on debt to finance the acquisition of participations under Art. 10 Austrian CIT Act are tax deductible.

Whereas the ITS ruled that a wide range of financing costs and costs for the procurement of funds made to the creditor and/or third parties such as brokers, notaries, and lawyers are tax deductible, the Austrian Administrative High Court only explicitly confirmed commitment fees as tax deductible in its ruling. Although it can be argued that other above-mentioned financing costs are also covered by the broader definition of interest, this was not relevant in the case in question and thus the Austrian Administrative High Court did not deal with these issues.

Goodwill amortization within a tax group submitted to the CJEU for preliminary ruling

Since the Austrian group taxation regime was established in 2005 (and for acquisitions till 28 Feburary 2014 - abolishment of the goodwill amortization with the 2014 Austrian Tax Amendment Act), goodwill amortization related to group members is only allowed after share deals if the following criteria are met:

  • Shares in the group member were acquired from a third party, that is neither a member of the tax group, nor a member of the same corporate group, nor (indirectly) from a shareholder with dominant influence on the buyer;
  • The acquired company becomes a group member;
  • The acquired company is an Austrian corporation with an operating business.

If the above-mentioned criteria are met, amortization is limited to 50% of the acquisition costs which must be spread over a period of 15 years.

From an EU perspective, the Austrian regulations restricting goodwill amortization to Austrian target companies have been subject to discussion regarding the possible infringement of freedom of establishment and free movement of capital within the EU.

The Austrian Independent Tax Senate ruled in its decision of 16 April 20134 that based on the freedom of establishment, goodwill amortization is also allowed if goodwill relates to acquired group companies resident in the EU. The Austrian Independent Tax Senate stated that there is no objective justification for the unequal treatment of shares in Austrian companies and EU companies.

The Austrian tax authorities filed an appeal against the decision with the Austrian Administrative High Court.5 The Austrian Administrative High Court found not only a possible infringement of the freedom of establishment but also of the prohibition of domestic State Aid, as the goodwill amortization can only be applied for share deals within a tax group. On 30 January 2014, the Austrian Administrative High Court applied for a preliminary ruling of the Court of Justice of the European Union (CJEU)6 on the following questions:

  • Can goodwill amortization be qualified as a prohibited domestic State Aid (Art. 107 EC Treaty) as it aims to reduce the tax base and therefore the overall tax burden of a tax group?
  • Does the goodwill amortization infringe the freedom of establishment as set forth in Article 49 EC Treaty?

The preliminary ruling of the CJEU7 is still pending and the decision of the CJEU remains to be seen.

The fact that the Austrian Administrative High Court also raised the question of compatibility with State Aid rules means that the proceedings are also of vital interest for existing tax groups claiming goodwill amortization. If the CJEU qualifies the rules as forbidden State Aid, Austria might need to recollect benefits gained in the past from Austrian tax payers (i.e., from tax groups claiming goodwill amortization).

However, the Austrian legislature has already reacted to the ruling of the Austrian Independent Tax Senate and abolished the goodwill amortization with the 2014 Tax Amendment Act (Abgabenänderungsgesetz 2014). As a consequence, goodwill amortization is no longer possible for share deals after 28 February 2014. Open amortization amounts (fifteenths) from the past basically remain tax deductible in the future (under certain requirements) if the acquired company becomes a group member by the end of fiscal year 2015 at the latest.

Endnotes

1. Austrian CIT Guidelines 2013, para. 1272

2. UFS RV/1351-L/10

3. VwGH 2011/15/0199.

4. UFS RV/0073-L/11.

5. VwGH 2013/15/0186.

6. EU 2014/0001.

7. EuGH C-66/14.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Steuerberatungs- und Wirtschaftsprüfungsgesellschaft m.b.H., Vienna
  • Andreas Stefaner
    +43 1 211 70 1041
    andreas.stefaner@at.ey.com
  • Roland Rief
    +43 1 211 70 1257
    roland.rief@at.ey.com
  • Markus Stefaner
    +43 1 211 70 1283
    markus.stefaner@at.ey.com
  • Klaus Pfleger
    +43 1 211 70 1179
    klaus.pfleger@at.ey.com
  • Patrick Plansky
    +43 1 211 70 1142
    patrick.plansky@at.ey.com
  • Dominik Novak
    +43 1 211 70 1303
    dominik.novak@at.ey.com

EYG no. CM4363