Austria: New Rules For Real Estate Transfer Tax On Share Deals

1     Introduction

In mid-May 2015, the Austrian government published the text of the changes in the country's tax system that will enter into force on 1 January 2016. One aspect of these impending changes that has not yet been subject to wider discussion is a modification in the rules to the Real Estate Transfer Tax ("RETT") on Share Deals.

To date, RETT has only been triggered if one person (or more companies which are either part of the same VAT group pursuant to sec 2 Austrian VAT act – being economically, financially and organizationally incorporated in the other company that it does not have a will of its own - or would be if they had their seat in Austria) acquired all of the shares of a corporation owning real estate in one or several steps. RETT triggered was 3.5% of 3-times the taxable value ("Einheitswert") of the real estate, with a cap at 30% of the market value.

In the course of Austria's Tax Reform Act 2015/2016, increased RETT volumes will also serve as one of the sources to finance reductions in the country's income tax rate. Besides the increase of RETT on transactions between close family members, the finance minister also discovered an additional means of promoting tax revenues by restricting the possibility of avoiding RETT by choosing a share deal.

2     New taxable transactions

2.1  Transfer of shares in a partnership

By definition, a partnership has two or more shareholders. Therefore, the acquisition of all shares by one person has not been possible unless both shareholders belonged to the same VAT group – a fact that was easy to avoid. Even in the case of a GmbH & Co KG (limited partnership with the personally liable partner being a company with limited liability) in which one person purchased all shares in the GmbH and the only limited partnership-share and then had economically 100% of the partnership was considered not to be subject to RETT.

Looking to Germany, the Austrian law will now introduce the rule that the change of at least 95% of the substance of the partnership to new shareholders within five years constitutes a taxable event for RETT. In addition, the new tax law clarifies that shares transferred to a trustee shall be calculated for the benefit of the trustor, thus explicitly excluding the normal trust constructions which have been widely used in the past. However, the new law only looks at the direct shareholders. The draft of the explanatory notes explicitly refers to a minimum of 95% of the "directly held" shares being passed over to new shareholders. Therefore, a change in the indirect shareholding that may occur if the shareholder itself is sold or the ultimate parent of the group is sold should not be an event that triggers RETT under the new law.

The basis for the calculation of the real estate transfer tax of 3.5% is the taxable value ("Einheitswert"), which normally ranges between 5% and 15% of the market value.

The explanatory notes state that this new provision should align partnerships with corporations with respect to RETT. However, this is not completely true, as the requirement that the transfer of 95% of the shares must happen within 5 years does not apply to corporations, for which the law looks at the unification of the shares in one hand and not for the transfer of shares and for which no time limit exists for such a unification of shares.

Basically, the draft text suggests that possibilities might exist to avoid RETT. One would be to transfer just below 95% of the shares in a first step and then to wait at least 5 years to transfer the remaining shares. The second possibility lies in not transferring the shares of the partnership holding the real estate, but rather the shares of the partners in the partnership itself.

2.2  Transfer of shares in a corporation

Here the law will change inasmuch as that RETT is triggered if at least 95% of all shares of the corporation are unified in the hands of a single shareholder. In addition, not only companies belonging to the same VAT group, but also companies belonging to a group of companies ("Unternehmensgruppe") pursuant to § 9 of the Corporation Tax Act ("Körperschaftsteuergesetz") will be treated as one person with respect to the unification of at least 95% of all shares in one corporation. As is the case in partnerships, shares belonging to a trustee will be calculated for the benefit of the trustor.

In contrast to partnerships, no time limit will be applied to when the minimum of 95% is reached. Therefore, it does not matter whether the remaining shares are acquired at a later stage or in the first step.

However, corporations mirror partnerships in that the RETT is only triggered if a direct acquisition takes place. RETT is not triggered in the event of the indirect acquisition of shares in the shareholders of a corporation holding real estate.

In this case too, the basis for calculating the RETT of 3.5% is provided by the property's taxable value ("Einheitswert"). This rate is lower than that established in the law currently in force, whose basis is three times the taxable value.

3     Outlook

It remains to be seen whether there will be changes made to the draft legislation before the law is finally passed by the Austrian parliament that would also hinder the above-mentioned possibilities for avoiding RETT in case of a share deal. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.