Why the sale of Austrian real estate by a company can trigger an exit tax at shareholder level

Larissa Constanze Wagner

Binder Grösswang Rechtsanwälte GmbH, Vienna
wagner@bindergroesswang.at

Introduction

Asked to provide its view on a specific case, the Austrian Federal Ministry of Finance recently responded that the sale of real estate property by an Austrian company could trigger Austrian exit tax at the level of a non-resident shareholder; it also clarified at what point in the process such a tax would be triggered.[1]

Background

In the case at hand, a German resident shareholder held shares in an Austrian resident company. The Austrian company’s assets consisted of only one real estate property located in Austria, ie, almost 100 per cent of the company’s assets were immovable property.

According to Austrian national law, any circumstances which lead to a restriction of Austria’s right to tax for the benefit of other states may trigger the Austrian exit tax.[2] In case of such an exit tax scenario, a sale of the shares would be assumed, and the deemed capital gain of the shares would be subject to Austrian income tax at a flat rate of 27.5 per cent for individuals. Capital gains realised by shareholders who are subject to limited tax liability in Austria (non-resident taxation) are taxable in Austria if at least one per cent was held in an Austrian corporation at one point in time during the last five years prior to the sale.[3]

According to Article 13(2) of the Double Tax Treaty Austria–Germany, capital gains derived by a resident of a contracting state from the alienation of shares in a company, whose assets mainly consist of immovable property, may be taxed in the other state. In contrast to that, the alienation of shares in other companies is taxable in the contracting state in which the shareholder resides (Article 13(5) of the Double Tax Treaty Austria–Germany).

Applied to the current case, Austria has the right to tax the capital gains on the shares in the Austrian company, based on Article 13(2) of the Double Tax Treaty Austria–Germany, as long as the company mainly holds Austrian real estate property (a so called ‘real estate company’). At the time that the Austrian company did not qualify as a real estate company anymore, capital gains in the shares were only taxable in the residence state of the company’s shareholder (in this case, in Germany), which is why Austria lost the right to tax in this respect. In order to determine if a company qualifies as a real estate company, the assets on the balance sheet date prior to the sale of the shares are decisive, according to paragraph 4 of the protocol to the Double Tax Treaty Austria–Germany. Since the assets on the last balance sheet date are decisive, the company’s real estate could basically be sold during the year without triggering the exit tax, as Austria would still be allowed to tax the capital gains of the shares until the next balance sheet date.

Only if the company does not qualify as a real estate company at the next balance sheet date, do the capital gains of the shares become taxable in the residence state of the shareholder (ie, Germany), according to Article 13(5) of the Double Tax Treaty Austria–Germany. At the same time, Austria loses the right to tax the capital gains on the shares in relation to Germany. As a result, a sale of the shares would be deemed to have occurred at the end of the balance sheet date and the Austrian exit tax would be triggered.

The protocol to the Double Tax Treaty Austria–Germany clarifies which date is decisive for the qualification of an entity as a real estate company. However, with respect to other double tax treaties that contain a similar provision (for example in the double tax treaties with France, Singapore, Ukraine and the US), the Austrian exit tax could potentially be triggered at the time of the sale of the real estate during the year if such clarification is not included in the treaty. The consequence is that if an Austrian company that is a real estate company for double tax treaty purposes, sells real estate during the year and after such a sale only holds cash, but then buys real estate again before the balance sheet date and becomes a real estate company again, no exit tax is triggered if the shareholder is in Germany, while the exit tax might be triggered in relation to shareholders in other countries.

Additional aspects that arise in the case described above are whether the shareholder can apply for a deferral of the exit tax or whether general principles of tax law, namely that tax treaties should not lead to higher taxes, postpone the taxation to the date when the shares are actually sold, rather than when such disposition is only deemed to have occurred.