Transfer of residence in Austrian commercial and tax law

• Author: Bernhard Fölhs; Sabine Heidenbauer
• Pages: 1-18

Page 1

1. Introduction

More than fifteen years ago, Austria introduced an exit tax regime¹²; later amendments were introduced in order to adopt a system compatible with Community law.³ The Austrian Individual Income Tax Act (IITA) contains two major provisions dealing with the exit of taxpayers: sec 31 no 2 ⁴ (for individual tax- payers) and sec 6 no 6 IITA (for legal entities). This contribution scrutinizes both regimes and examines their compatibility with Community law.

2. Individual Taxpayers

2. 1 Exit Taxation

As a reflection of the de Lasteyrie du Saillant decision of the European Court of Justice⁵ Austria's exit taxation regime was revised within the framework of the Page 2 Tax Amendment Act 2004⁶. This amendment brought considerable changes, as claimed in legal writing already prior to the de Lasteyrie du Saillant judgment.⁷The Austrian exit taxation regime is ruled in sec 31 no 2 IITA⁸: In case an Austrian individual who owns shares of a company in the amount of at least 1 % of the share capital, transfers his residence for tax purposes outside of Austria, the capital gain is determined in the amount of the difference between the acquisition costs and the fair market value of shares of that kind, at the time of transfer of residence⁹. Pursuant to ECJ case law, taxation of these capital gains shall be deferred if the individual moves either to an EU member state or to an eligible EEA member state.¹⁰ This system of deferral is the main achievement in comparison to the regulation in force prior to the Tax Amendment Act 2004¹¹ as under the previous legal framework, all actions of a taxpayer leading to the loss of Austria's right to tax to the benefit of another state regarding shares immediately triggered liability to tax.¹²

Upon actual disposal of the shares as well as upon transfer of the individual's residence for tax purposes to a state other than an EU member state or an eligible Page 3 EEA member state, the deferred tax shall be levied. It must be pointed out that the taxable capital gain is limited to the capital gain inherent in the shares upon transfer of residence outside Austria, which is based on the goal of this regulation to tax only capital gains earned during an individual's unlimited tax liability in Austria. Decreases in value occurred in the period between the transfer of residence and the disposal of the shares are deductible, though not exceeding the taxable base at the time of the transfer of the residence for tax purposes.

2.1. 1 Term "Shares"

The Austrian exit taxation regime refers to the concept of shares of sec 31 no 1 of the Individual Income Tax Act¹³, where taxation of disposal of shares is ruled. This regulation requires holding shares of a company in the amount of at least 1 % of the share capital. Hence the loss of Austria's right to tax is only covered, if the taxing right regarding shares fulfilling this condition is getting lost. Therefore tax liability only arises in cases the physical person was holding shares in the amount of at least 1 % of the share capital.¹⁴

This underlying rule defining shares does not distinguish between shares in domestic and foreign companies. Hence the Austrian exit tax covers shares in domestic companies as well as shares in foreign companies.¹⁵ In course of transfer- ring the residence for tax purposes shares in domestic companies are covered, insofar Austria looses its right to tax due to a Tax Treaty.¹⁶ However shares in foreign companies are always covered, as all transfers of residence lead to originating tax liability according to sec 31 of the Individual Income Tax Act¹⁷, not Page 4 only transfers to DTC-states. In these cases entry into limited tax liability causes the loss of Austrian taxing right of future earnings from disposals of shares already according to domestic law.¹⁸

2.1. 2 Loss of Austria's taxing right opposite to other state

The inclusion of the loss of Austria's taxing right opposite to other states is an extension of the element of the rule regarding the sale of share holdings. The addition "opposite to other states" provides a clarification of this regime.¹⁹ The tax liability covers the transfer of residence for tax purposes of an individual, as well as the gratuitous transfer of shares to a foreign taxpayer and furthermore the contribution to foreign trusts, provided that the Austrian right to tax gets lost on the basis of the Individual Income Tax Act²⁰ in connection with the respective Double Tax Treaty in all these cases.²¹ The common term "exit tax" does not meet the scope of this rule, as on the one hand cases without departure are covered; on the other hand departure (abandoning the domicile and the habitual abode) does not cause tax liability mandatory.²²

2.1. 3 "Action of the taxpayer" changed to "circumstances"

The loss of Austria's taxing right is only covered in cases underlying an action of the taxpayer. According to the prevailing opinion active actions of taxpayers, as Page 5 transfer of residence or transfer of shares to a foreign taxpayer, can anyway be subsumed under the wording of this rule.²³ Following this argumentation leads to problems in the field of dispositions on death. Beside donations also testamentary dispositions would be covered, other than intestate succession, in default of an active action of a taxpayer, as death can not be considered as an action. A distinction in this vein can not be justified.²⁴ Anyway the loss of Austria's taxing right caused by concluding a DTC can not at all be regarded as an action of tax- payer.²⁵

Middle of April 2007 this long lasting discussion was concluded by the legislator by amending the law. The wording "action of the taxpayer" will be replaced by "circumstances".²⁶ This amendment shall clarify that this rule covers all cases of loss of the domestic right to tax (e.g. the death of the taxpayer). The use of the term "circumstances" straightens out that an active action of the taxpayer is not required.

2.1. 4 Application for Non-Determination of the occurred tax liability

Since 1.1.2005 the Austrian Individual Income Tax Act²⁷ offers the possibility to file an application within the tax return for Non-Determination of the occurred Page 6 tax liability in cases of transferring the residence²⁸ either to EU member states or EEA member states provided comprehensive administrative assistance and enforcement assistance. Presently Austria maintains cooperation of this kind with Norway²⁹, but not with the other countries of the EEA (Iceland and Liechtenstein). Switzerland is not a member state of the EEA and furthermore Austria does not maintain an extensive mutual assistance with Switzerland, what causes doubts on interpretation in such cases.³⁰

The arisen tax due shall be fixed but deferred and shall be levied upon actual disposal of the shares as well as transfer of the residence for tax purposes to a state other than an EU member state or an EEA member states provided comprehensive administrative assistance and enforcement assistance. Assuming the taxpayer is holding different shares, he is permitted to file applications for the single shares independently.³¹

An example may illustrate the effect of this regime (including situations of de- crease in value)³²: Page 7

Case 1	Case 2	Case 3
Fair Market Value at the time of departure (2008)	800	800	800
Revenue of Sale of Share holdings after departure (2012)	700	900	400
Taxable Income (2008) in case of Application for Non-Determination (2008)	200	300	0
Taxable Income (2008) in case of taxation 2008 (no Application for Non-Determination)	300	300	300

2.1. 5 Taking up residence - Entering Austria's right to tax

In cases of entering Austria's right to tax opposite to other states, the fair market value is determined as assessment basis instead of the acquisition cost, at the time of taking up residence in Austria.³³ The intended purpose of this regime is to only tax the increase of value earned during periods, while these shares were assigned to Austrian taxation right, to avoid double taxation. In the event of a deferral according to sec 31 no 2 of the Individual Income Tax Act (IITA)³⁴followed by re-entering Austria's right to tax the acquisition costs are applicable. Otherwise an untaxed step-up to the fair market value could be the outcome.³⁵ Page 8

2. 2 Compliance with Community Law

After the amendment of the Austrian exit taxation regime within the framework of the Tax Amendment Act 2004³⁶, as response to the Lasteyrie du Saillant decision of the European Court of Justice³⁷, Austria has currently a regime in force, which seems to be compatible with Community law, as well as ECJ case-law. This fast reaction of the legislator acted as an international "example".³⁸

Whereas the past regime infringed the freedom of establishment,³⁹ the present exit taxation in the field of individuals⁴⁰ also seems to be in accordance with the latest communication of the commission, as there is no difference in treatment any more, which could constitute an obstacle to free movement, based on taxing residents at the time of realisation contrary to taxing departing residents on an accruals basis.⁴¹ Furthermore the Commission affirms - as...