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Exit Tax in Case of Outbound Cross-Border Mergers: Recent Austrian Tax Law Changes

Niklas Schmidt, Wolf Theiss, Austria , Wolf Theiss, Austria

The Austrian Reorganization Tax Act (Umgründungssteuergesetz) deals with the tax consequences of various types of corporate restructurings. Pursuant thereto, in particular mergers (namely domestic mergers as well as cross-border mergers involving Austrian corporations) can be carried out in a tax-neutral manner. One prerequisite for such tax neutrality is that Austria does not – as a result of the merger – lose its possibility to tax the built-in gains of assets transferred. This is obviously an issue in outbound cross-border merger cases, where an Austrian corporation (as transferring company) is merged with a non-Austrian corporation (as receiving company): While some assets of the former may physically remain within the Austrian tax jurisdiction (e.g., Austrian real estate or assets of an Austrian permanent establishment) and will remain taxable in Austria, other assets may not be taxable anymore in Austria in the hands of the receiving company due to a combination of domestic law and treaty law. Regarding such assets which escape the Austrian tax jurisdiction, Austria levies a 25% exit tax based on the latent gains.

Obviously, such exit tax may negatively impact the attractiveness of an outbound cross-border merger. However, in the past, in case of a merger into a receiving entity that was (i) an EU corporation as set out in the annex to the Austrian Reorganization Tax Act; or (ii) a comparable corporation resident in Norway or Liechtenstein, having its place of management in one of those states, an application for deferral of such exit tax could be made in the transferring entity's last corporate income tax return. This meant that although the tax burden on hidden reserves arose at the time the merger became effective (and was calculated in the transferring company's corporate income tax assessment note regarding that year), the tax was only to be levied at the time when the capital gains of the assets concerned were in fact realized (for example when the assets were sold by the receiving entity). The tax then retroactively fell due, provided that this happened within the statute of limitations of ten years (thus, after ten years Austria definitively lost its possibility to tax). The tax deferral concept was originally introduced based on an understanding that this was mandated by case law of the European Court of Justice (cf. ECJ, 11 March 2004, C-9/02 – Hughes de Lasteyrie du Saillant).

In this context, important changes recently went into force (Tax Amendments Act of 2015 [Abgabenänderungsgesetz 2015]): Since 1 January 2016, the tax deferral concept mentioned above has been superseded by an instalment concept. Instead of the possibility of deferring the exit tax until actual alienation of the assets concerned, the only relief from immediate taxability that now remains is the option to spread the tax payments over a term of seven years (for fixed assets) or of two years (for current assets). The reason for this change apparently are budgetary considerations coupled with newer case law of the ECJ which now seems to allow taxation in instalments in lieu of deferred taxation (cf. ECJ, 23 January 2014, C-164/12 – DMC Beteiligungsgesellschaft mbH, and 21 May 2015, C-657/13 – Verder LabTec GmbH & Co. KG).

It can be expected that the changes to the Austrian Reorganization Tax Act will make outbound cross-border mergers of Austrian corporations more costly and thus might have a dampening effect on such transactions. In this context it should be noted that on 28 January 2016, the European Commission released a proposal for a "Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market". This proposal would, inter alia, require EU Member States to provide for exit taxation. If adopted, a further amendment of Austria's just recently modified exit taxation rules will become necessary.

  1. Dr. Niklas J.R.M. Schmidt, TEP, is a partner with WOLF THEISS Attorneys-at-Law in Vienna, Austria. He may be contacted by email at Ms. Cynthia Pfister is an associate there and may be contacted at