VwGH: Restriction on the transfer of hidden reserves in the case of private foundations
In its decision of 17.11.2022, Ra 2021/15/0053, the Administrative Court (VwGH) restricted the transferability of hidden reserves in private foundations and thus made the conditions for the tax benefits remaining to private foundations subject to more restrictive requirements.
Section 13 (4) of the Austrian Corporation Tax Act (KStG) enables private foundations to transfer hidden reserves from the sale of participations not held for business purposes – in which the foundation or its legal predecessor held an interest of at least 1 % within the last five years – to replacement participations in a tax-neutral manner. These replacement participations must involve the acquisition of a share in a corporation of more than 10 % (“replacement acquisition”).
The purpose of the transfer option for hidden reserves is to have the undiminished proceeds from the sale of an asset available for new investments. It is therefore an investment allowance to enable replacement purchases.
Previous view of the tax authorities
According to long-standing administrative practice (StiftRL Rz 117), a capital increase (including premium) in an already existing shareholding of the private foundation is also to be considered a replacement acquisition for the purposes of section 13 (4) KStG. Accordingly, it is to be assumed that the transfer of hidden reserves is also to be applied if the foundation already holds all shares in the capital company.
New VwGH jurisprudence
However, in its decision of 17 November 2022, Ra 2021/15/0053, the VwGH denied a private foundation the transfer of hidden reserves pursuant to section 13 (4) KStG. A capital increase in an already existing, 100 % subsidiary was not sufficient, as this was not seen as an “additional” acquisition of more than 10 % of the shares. An acquisition of new shares to the extent of at least 10 % in a subsidiary already wholly owned was not possible. The VwGH thus contradicts the view previously held by the financial administration.
In its legal assessment, however, the VwGH states that a suitable replacement acquisition can also be made through the establishment of a new subsidiary by the private foundation. Likewise, the transferability of hidden reserves can be achieved through an ordinary capital increase (in a corporation that is not already wholly owned), provided that the private foundation thereby acquires an additional share of at least 10 % in the corporation.
In the past, the transfer of hidden reserves from the sale of participations by a private foundation was often carried out to other, already existing 100 % subsidiaries of the private foundation through a capital increase and premium. According to the present Administrative Court decision, this is no longer possible. The VwGH, on the other hand, decidedly allows the establishment of a new subsidiary as a suitable replacement acquisition. This opens up room for manoeuvre.
Ultimately, the legal opinion of the VwGH is much stricter than that of the tax authorities, which will have far-reaching consequences for practice. How the tax authorities will deal with so-called “old cases” in the light of this decision and what the practical administrative consequences will generally be for future transfers of hidden reserves under section 13 (4) KStG can be eagerly awaited.