The opinions address the tax treatment of:
- Dividend payments after cross-border side-stream mergers
- Distribution of retained earnings in the course of share sales
Read the Ministry of Finance opinions (German)
Dividends paid out after a side-stream import-merger
The merger of a foreign corporation into its Austrian sister-corporation results in a tax-neutral, step-up in basis of all assets and liabilities transferred. In the past, it was questioned whether such a step-up also resulted in an increase in the equity-capital recognized for tax purposes of the absorbing corporation that can be repaid as a “dividend” to the shareholder tax-neutrally and therefore without any withholding tax levied under Austrian law—regardless of the rules and regulations of any applicable income tax treaty.
A ruling of the Austrian Ministry of Finance, published in the Reorganization Guidelines 2002 (Mn 370), provides that the equity-capital recognized for tax purposes of the Austrian absorbing entity in a cross-border side-stream merger is increased by the fair market value of the transferred entity.
As a result, the “high amount” of equity-capital for tax purposes can be distributed to the shareholders of the Austrian corporation without triggering dividend withholding tax in the future.
Dividends paid after share-deals
Dividend distributions received by an Austrian corporation are tax-free. Capital gains from the alienation of Austrian shares are taxable. If profits are not distributed but instead are retained by the Austrian entity, the fair value of the corporation increases, resulting in higher capital gains upon disposal of the shares.
Facing these rules—i.e., tax-exemption for dividends received, taxable capital gains upon a share disposal—a distribution of the full amount of retained earnings to the seller was frequently agreed upon in the respective SPA, even if it was already the acquiring party that passed the respective resolution on the dividend-distribution after year-end.
Up to now, dividends paid out to the (previous) shareholder, following a share sale, have been regarded as tax-free dividends by the Austrian tax authorities.
In the revised Corporate Income Tax-Guidelines 2013 (recently published by the Austrian Ministry of Finance) this position has changed (Mn 1168). According to the new opinion, dividends are only tax-free if the recipient of the dividend is still the owner of the shares as of the date when the respective resolution for the dividend distribution is passed. If, however, the recipient of the dividend has sold the shares before the dividend distribution resolution date, the dividend payment is considered a part of the sales price and, therefore, increases taxable capital gains.
In this respect, the acquirer of the shares may also face an issue—any impairment to be effected at the level of the buyer resulting from the distribution of retained earnings is non-deductible. According to the Austrian tax authorities, however, any future revaluation results in a taxable profit.
For more information, contact a KPMG tax professional in Austria:
+43 1 31332 407
+43 1 31332 777
+43 1 31332 259