25. June 2024 The BFG (Federal Fiscal Court) had already ruled in favour of ARTUS that the registration of a domestic branch for a group parent with limited tax liability is contrary to EU law. This has now also been confirmed by the VwGH (Administrative Court) and sets out certain requirements for the allocation of taxable results.
For the specific case, please see our blog post from 16 May 2022.
The formation of a corporate group in accordance with the Corporation Tax Act (KStG) – current legal requirements
The purpose of Austrian group taxation in accordance with Section 9 KStG is to equalise earnings between the group members and their group parent. The group parent pools the annual tax results and thus the taxation of the aggregated group tax result.
In order for a foreign EU/EEA corporation with limited tax liability to be authorised to act as a group parent pursuant to Section 9 (3) KStG, the following requirements must be met:
- The foreign (comparable) corporation must have a registered branch in the Austrian commercial register, and
- the participations to be included in the Austrian group taxation must also be attributable to this branch office.
In practice, the requirement for entry in the commercial register means that domestic office premises are necessary for the branch office, a rental agreement must usually be attached to the commercial register application or, especially in urban areas, the premises must pass inspection by the Chamber of Commerce. According to the requirements of the Commercial Register Court, it is essential that the branch office has operations, staff, premises, etc. in Austria. In addition, a shareholding is deemed to belong to a permanent establishment if there is a functional connection between the shareholding and the activities of the permanent establishment and essential personnel functions are performed at the permanent establishment.
Both the establishment or registration of a branch office in the commercial register and the subsequent attribution of participations to this branch office are therefore associated with a not inconsiderable amount of work and obligations to provide evidence.
European legal requirements in general
The EU’s main objective is economic unity and equal treatment. This is expressed in particular through the freedom of establishment of persons from one Member State in other EU Member States, which is decisive here. This means that domestic and foreign persons – both natural and legal persons – must be treated equally and not discriminated against.
As the Administrative Court further explains with reference to the case law of the ECJ, a restriction of the freedom of establishment can be justified in exceptional cases by the need to ensure the internal logic and consistency of a tax regulation in certain cases. Member States must be able to prevent (cross-border) double loss utilisation. The requirement to register a branch is, in principle, a suitable means of preventing such double realisation of losses. However, restrictions of Union law are only permissible on the condition that they do not go beyond what is necessary to achieve a specific objective (e.g. avoidance of double realisation of losses).
The Administrative Court comes to the conclusion that the requirement to register a domestic branch goes beyond what is necessary to avoid the double realisation of losses, and is therefore contrary to the freedom of establishment and, as a result, contrary to EU law.
Application of the KStG in conformity with EU law
National law that conflicts with directly applicable Union law in a specific constellation is superseded for the respective constellation. The supersession of national law must be carried out with the least material interference that is sufficient to bring about a situation in conformity with Union law (“reduction in the scope of application”).
In the view of the Administrative Court, the following approach or reduced application of the Austrian Corporation Tax Act (KStG) in order to preserve the law complies with Union law and the freedom of establishment:
- The foreign parent company can – even in the absence of a registered domestic branch in the commercial register – be formally recognised as the head of the group.
- For the purposes of aggregating the results of the group members for group taxation purposes, the direct Austrian subsidiaries are treated as Austrian permanent establishments of the foreign group parent.
- When aggregating the results of the group members, the provisions of the Austrian Corporation Tax Act (KStG) must be complied with (in particular with regard to pre- and extra-group losses).
- Austria has the right to tax the summarised results of the Austrian group members.
- Excess losses from the combined results of the Austrian group members represent a loss that can be carried forward by the foreign group parent.
With its ruling, the Administrative Court confirms the content of the BFG and provides for a different solution in the technical implementation to achieve the objective of equalising the results of the Austrian companies. The BFG ruling, which was revoked for this reason, must now be re-issued by the BFG in accordance with the path outlined by the VwGH. For future cases, it would also be highly desirable for the legislator to amend the provisions in Section 9 (3) KStG that are contrary to European law.
We are pleased to have successfully handled this case for our client.
If you have any questions about group tax law, please contact ARTUS (info@artus.at).
PS: Please note, that we are no native speakers and that our blogposts were translated with the help of AI.
