The Ministry of Finance has published an EAS ruling on the Austrian tax consequences of a cross-border merger of a German corporation into a Liechtenstein corporation, where the German company indirectly holds 100% of the shares in an Austrian real estate company.
The OECD MC holds in art. 13(1) that gains derived by a resident of a Contracting State from the alienation of immovable property that is situated in the other Contracting State may be taxed in that other State. This provision is applicable if the immovable property is held directly. In addition, the OECD MC provides in art. 13(4) that gains from the sale of shares in a company that owns real estate may be taxed in the Contracting State in which the real estate is located, provided that more than 50% of the shares' value is derived directly or indirectly from immovable property. This so called real estate or immovable property clause has been included in several newer Austrian double tax treaties (e.g., those with Germany, Poland and Romania).
In light of this, the Ministry of Finance recently dealt with a case where a German company held 100% of the shares in an Austrian company through an intermediary Austrian partnership (not operating an active trade or business), while the assets of the Austrian company solely comprised immovable property situated in Austria (20 July 2017, EAS 3388). It was planned to merge the German company into a Liechtenstein company with retroactive effect as of 30 June 2017 (the merger date). The absorbing Liechtenstein company was incorporated as of 1 September 2017, i.e., after the merger date.
The Ministry of Finance correctly held that the Austrian right of taxation in respect of the shares of the Austrian company is lost: In contrast to the double taxation treaty with Germany, the double taxation treaty with Liechtenstein ("DTT Liechtenstein" ) does not contain a real estate clause. Therefore, gains from the sale of shares in an Austrian company held by a Liechtenstein company and exclusively owning immovable property in Austria may only be taxed in Liechtenstein (art. 13(2) of the DTT Liechtenstein). Since the Austrian right of taxation in the shares of the Austrian company is lost, the provisions of the Austrian Reorganisation Tax Act (Umgründungssteuergesetz ) cannot grant tax neutrality in the case at hand. As a consequence, Austrian corporate income tax would fall due on the hidden reserves.
One important question here is at what point in time the DTT Liechtenstein had to be applied (and consequently at what point in time the Austrian right of taxation in the shares of the Austrian company was lost). Interestingly, the Ministry of Finance argues that this was on 30 June 2017, on the retroactive merger date. In this context it is important to note that for the DTT Liechtenstein to be applicable, residency of a taxpayer in at least one of the Contracting States is required, which in turn necessitates that such taxpayer has its legal seat and its place of effective management in that Contracting State (arts. 1 and 4 of the DTT Liechtenstein). While the Liechtenstein company had not been incorporated on the merger date (and thus could not have had its legal seat or its place of effective management in Liechtenstein), the Ministry of Finance argued that, from a tax perspective, the assets of the German company were transferred to the Liechtenstein company as of the end of the retroactive merger date. This means that for fiscal purposes, the Liechtenstein company had to be regarded as subject to comprehensive taxation in Liechtenstein as of the merger date, which also means that the DTT Liechtenstein was applicable from that point of time.
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