VwGH: Group formation with EU/EEA group parent without a branch in Austria

The VwGH recently confirmed the possibility of forming a group with an EU/EEA group parent without a branch in Austria and thus declared a corporate group between Austrian sister companies whose common parent company is domiciled abroad and which does not have a branch in Austria to be permissible, contrary to the wording of Sec 9 KStG.

On 31 March 2022, RV/7104573/2020, the Federal Fiscal Court (BFG) had already surprised the experts by declaring the formation of an Austrian tax group in accordance with Sec 9 KStG between Austrian sister companies permissible if their joint parent company is domiciled abroad and does not have a branch office in Austria. The VwGH (27.03.2024, Ro 2023/13/0018) has now confirmed this, albeit in a different way and with a different justification. However, this finding raises further questions.

1. The Case

A German parent company (corporation), which neither has an Austrian branch nor holds an interest in an Austrian operating partnership, holds the majority of shares in two operating Austrian corporations (more than 50 % of the voting rights and capital shares in each case).

This German parent company submitted an application for the establishment of an Austrian corporate group in accordance with Sec 9 KStG from the 2017 tax assessment onwards. Accordingly, the German parent company was to be the group parent and the two corporations based in Austria were to be group members.

2. Key statements of the VwGH

According to Sec 9 (3) KStG, EU/EEA corporations can only be group parent companies of an Austrian corporate group if they have a registered branch office in Austria and the shareholdings of the Austrian group members can be attributed to this Austrian branch office.

Referring to the case law of the ECJ on group taxation in other member states (ECJ 12 June 2014, C-39/13, SCA Group Holding and Others.; ECJ 14 May 2020, C-749/18, B and Others), the Administrative Court considers the requirement of an (Austrian) branch to be a violation of the freedom of establishment. However, the case was not referred to the ECJ.

In contrast to the previous decision of the BFG, the VwGH considers the assignment of the group parent function to one of the Austrian sister companies to be inadmissible; in such a constellation, only the foreign parent company can be the group parent.

In its reasoning, the Administrative Court stated that the purpose of group taxation is, in particular, to summarise (add up or offset) the tax results of financially affiliated entities with a group parent. As a result, the group members are treated similarly to permanent establishments of the group parent for group taxation purposes. “The requirements of EU law on group taxation can be complied with in the sense of a reduction that preserves the law with the least material interference by establishing the foreign parent company as the group parent and treating the direct Austrian subsidiaries as Austrian permanent establishments of the group parent for the purposes of aggregating the results of the group members within the framework of group taxation in compliance with the requirements of Sec 9 KStG 1988 (in particular with regard to pre-group and out-group losses).”

For the purposes of aggregating the group result, the Austrian subsidiaries should therefore be treated “similarly to Austrian permanent establishments of the group parent” according to the VwGH. As the tax group is to be seen as a tax consolidation without a merger (under company law), the group result is therefore also to be taxed at the foreign group parent according to the VwGH.

3. Initial considerations and practical implications

The present VwGH judgement allows the following initial conclusions to be drawn and raises the following questions in particular:

• According to the VwGH, the group result must be determined for the EU/EEA group parent. This will require the group parent to be registered for tax purposes in Austria.
• The statement by the Administrative Court that the domestic group members are treated “similarly to permanent establishments” could have an impact on the offsetting of pre- or extra-group losses of the two Austrian subsidiaries. Although the Administrative Court restricts the general statement (“similar to permanent establishments”) in its subsequent sentence to the direct Austrian subsidiaries, this could also be understood to mean that although the foreign parent company is the formal group parent, the direct Austrian subsidiaries are materially to be regarded as part of the foreign group parent. Such an understanding would allow the offsetting of pre- or extra-group losses (taking into account the 75 % limit) of the two domestic subsidiaries.
• It is unclear whether the Austrian direct group members must be operating companies within the meaning of the respective double taxation agreement (DTA) (see Art 7 in conjunction with Art 5 OECD Model Tax Convention).
• The assessment procedure for such a de facto sisters-group is also unclear, e.g. whether a zero declaration will be required for the foreign group parent.
• The current VwGH case law excludes the inclusion of a sister company in an existing group of companies, which would have been possible under the BFG ruling. This could be in conflict with the case law of the ECJ, which had considered an expansion to include sister companies without dissolving existing groups of companies to be required under EU law (ECJ 14 May 2020, C-749/18, B and Others).

Further developments in this regard and the practical implementation of this case law by the Austrian tax authorities remain to be seen. Our experts will be happy to answer any questions and provide further explanations.