Key issues from the Austrian tax perspective
In the case of a share deal, a regular focus point is the economic treatment of the distributable profits of the target company. As such, it is often subject to debate whether these retained earnings should be transferred to the buyer or whether the seller should distribute the profits before the share transfer and then sell the shares at a lower purchase price (to the extent permissible under company law). In M&A practice, a so-called dividend reservation is frequently agreed, according to which the seller is still entitled to receive the retained earnings.
From an Austrian tax perspective, if the seller is a corporation, it is crucial to determine whether such a reserved dividend is to be regarded either as (i) a distribution of profits, or (ii) a purchase price component. This is due to the Austrian participation exemption regime, according to which a profit distribution falls under the participation exemption (Sec. 10 öKStG), whereas a capital gain from the sale of shares in an Austrian corporation – in contrast to, for example, German tax law – is fully subject to the 25% corporate income tax (CIT).
Recent case law
The Austrian Federal Fiscal Court (BFG) had to assess the following case:
- Signing date of the share purchase agreement (“SPA”): 19 March
- Closing date: 1 April. Closing is subject to several conditions
- Sellers must ensure that the Company does not take any action outside the ordinary course of business between signing and closing without the consent of the buyers
- Dividend reservation of EURk 1,000. The profit distribution to the seller was agreed with the shareholder resolution of 28 March (i.e. between signing and closing)
The BFG solved the case by referring to the matter of beneficial ownership of the shares at the time of the dividend resolution. If the seller remains the beneficial owner of the shares at that time, the seller generally is also entitled to the profit distributions. On the other hand, if the agreed distributions can no longer be attributed to the seller for tax purposes (e.g. if the buyer can already fully exercise voting rights), dividend payments to the seller are not to be qualified as (tax-free) dividends, but rather as part of the purchase price. The time of the actual dividend payment, however, is irrelevant.
In the case at hand, the transfer of beneficial ownership over the shares took place at closing (1 April). At this date, the dividend resolution was already passed. Thus, the dividend may rightfully be attributed to the seller and the reserved dividend qualifies as a tax-free profit distribution for the seller (i.e. not a purchase price component).
From an Austrian tax perspective, a crucial distinction must be made if reserved dividends within the context of a share deal qualify as a tax-exempt profit distribution (Sec. 10 öKStG) or as a taxable capital gain subject to 25% CIT. This must be carefully analysed when drafting the SPA in terms of an M&A share deal transaction.
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