Federal Fiscal Court Decision on Tax Loss Forfeiture due to Acquisition of a Shell Company

The BFG (03.08.2023, RV/5101166/2018) has commented on the fulfilment of the criteria for a shell company acquisition. In this case, changes in the economic structure and the shareholder structure were denied. The criteria for a shell company acquisition were therefore not met, which is why the taxable Limited Liability Company (“GmbH”) was able to claim the existing losses for tax purposes.

Facts of the case and question posed

This case concerns the question of whether the complainant (a limited liability company) can claim the tax losses incurred in the years 2009 to 2013 for tax purposes in the years 2014 to 2016. In the meantime, the complainant's company has undergone several changes: In June 2010, the sole shareholder and managing director of the complainant had filed a liquidation petition with himself as liquidator. In August 2012, an application was made to dismiss the liquidator, continue the GmbH, and appoint a new managing director. To this end, 55% of the complainant's shares were sold to another GmbH. In 2014, the focus of the company's activities was changed from "acquisition, development and sale of real estate" to "brokering investments in real estate projects".

As part of an external audit, the competent authority took the view that the changes made met the criteria of a shell purchase pursuant to § 8 Abs. 4 Z 2 lit. c KStG and that the loss deduction was therefore inadmissible. As a result, the loss carry-forwards claimed from 2014 onwards were largely not recognized. The main allegation is that the shares in the GmbH were only acquired for the purpose of utilizing losses and that the previous managing director only formally continued to act as managing director for this purpose alongside another new managing director.

The BFG was now faced with the question of whether the changes made met the criteria of a shell company acquisition and, in connection with this, whether the realization of losses was permissible.

Decision of the BFG

In principle, the right to claim loss carry-forwards is no longer available from the point in time at which the identity of the taxpayer is no longer given because of a significant change in the organizational and economic structure in connection with a significant change in the shareholder structure against consideration in cash or in kind (= shell purchase). The aim of the shell purchase is therefore to prevent the realization of losses if the economic identity of a corporation is changed or even completely abandoned. The economic identity is made up of the company's assets (economic structure), the identity of its shareholders (shareholder structure) and its management (organizational structure). In order to meet the criteria, the significant changes to the economic and organizational structure as well as the shareholder structure must be cumulatively fulfilled from the overall facts and circumstances.

A significant change in the organizational structure exists if either all or most of the managing directors are replaced. The prevailing opinion assumes that a change of 75% of the managing directors is to be regarded as a "vast majority". Although this percentage was not formally reached, a significant change did in fact take place, as the management was no longer actually exercised by the previous managing director. Therefore, the BFG assumed a significant change in the organizational structure.

A significant change in the economic structure is assumed if the economic identity of the corporation, which results from assets and activities and is linked to the previous corporate purpose, is lost. This may be a qualitative and/or quantitative change. In this case, the company's activities have changed insofar as the focus of the company's activities has changed from "acquisition, development and sale of real estate" to "brokering investments in real estate projects" since 2014. In the opinion of the BFG, despite this change, the sector and the object of the company remained essentially unchanged. Rather, a continuous expansion process took place. As there was no planned connection between the individual changes, the BFG concluded that there was no significant economic structural change.

A significant change in the shareholder structure within the scope of the shell purchase is deemed to exist if more than 75% of the shareholders existing prior to the acquisition (in terms of voting capital) are exchanged. As only 55% of the shares were sold in this case, there was also no significant change in the shareholder structure.

Conclusion

As a result, the BFG found that the requirements for the existence of a harmful shell acquisition for tax purposes were not met, as in this case only one of the three required elements of a shell acquisition was fulfilled (significant change to the organizational structure), but not the other two elements (significant changes to the economic structure and the shareholder structure).

The BFG's opinion according to which there was no material change in the economic structure is particularly interesting and relevant, as this criterion is often subject to discussion in practice.

Since an appeal has already been  filed by the tax administration, it remains to be seen how the Supreme Administrative Court (“VwGH”) will judge the case in question.

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