Austrian tax law provides various reorganisation tools
for companies in an economic crisis. Among others, these include
shareholder contribution (in the broad sense), debt/equity swap,
debt waiver, assumption of debt, letter of comfort, participation
right, capital decrease, surety/guarantee, assumption of
performance, silent partnership, debt mezzanine swap and
restructuring trust.
Particularly in these challenging times due to the global
COVID-19 pandemic, companies should be aware of all available
reorganisation tools. The following article provides an overview of
some of them.
- Shareholder contribution (in the broad
sense)
Shareholders can contribute equity to the company on a voluntary
basis, which is called a shareholder contribution
(Gesellschafterzuschuss). However, there is no general obligation
for shareholders of an Austrian limited liability company
(“LLC”) to make such contributions in a crisis. In
principle, voluntary restructuring contributions in the form of
shareholder contributions cannot be reclaimed by any shareholder
not participating in such contributions. Shareholder contributions
are not based on the articles of association, but on a contractual
basis (e.g. a syndicate agreement).
If the share capital is raised instead, an ordinary capital
increase is required. Due to increased costs and strict formal
requirements, ordinary capital increases during a crisis are less
common.
If the shareholders’ obligation to provide equity capital is
stipulated in the LLC’s articles of association, such
contributions are referred to as a mandatory “additional
contribution” (Gesellschafternachschuss). The obligation of
the respective shareholders of the LLC to make such additional
contributions must be in relation to the underlying ownership
structure.
Income tax aspects
At the level of the shareholder, a shareholder contribution
increases the acquisition costs of the shareholder’s share in
the company (even if the receiving company is in an economic
crisis). A current-value depreciation due to a capital contribution
is only done in case the contribution turns out to be
non-recoverable, because the intended restructuring fails. An
immediate depreciation may be necessary if the contribution is
directly used to cover losses and no profit is expected soon.
At the level of the company, a shareholder contribution as capital
contribution increases the so-called disposable evidence
sub-account (disponibles Evidenz-Subkonto). In general, the
evidence sub-account is decisive whether repayments of equity can
be made tax neutral. If the shareholder is a corporation and there
is an impairment due to lack of recoverability of the contribution,
the depreciation is to be prorated over seven years. As regards
indirect contributions (e.g. grandparent subsidies), the
prohibition of the depreciation pursuant to Section 12 (3) (3) of
the Austrian Corporate Income Tax Act (“CITA”) must be
taken into account. This means that such a prohibition intends to
prevent depreciations at the level of multiple companies due to
indirect contributions.
The tax consequences of ordinary capital increases and additional
contributions correspond with those just mentioned regarding
voluntary shareholder contributions.
- Debt/equity swap
A claim of an existing or future shareholder against the company
is contributed into the company as a contribution in kind in
exchange for new shares due to a capital increase (debt/equity
swap). Only recoverable and due claims can be contributed into a
company. However, as claims against a company in a crisis are
normally non-recoverable, restructuring tools other than
debt/equity swaps should be considered in such cases.
Income tax aspects
At the level of the shareholder, the contribution results in (an
increase of) acquisition costs of the share.
At the level of the company, the contribution in kind increases
the disposable evidence sub-account.
- Debt waiver
As opposed to a debt/equity swap where a shareholder’s claim
is contributed into a company in exchange for new shares, a debt
waiver leads to the elimination of the claim. A debt waiver must be
documented in a bilateral contract, because the release of
contractually agreed liabilities is subject to the obligor’s
consent. Debt waivers can be made by shareholders or third-party
creditors. Outside of insolvency proceedings, debt waivers require
the consent of the company. In exceptional cases, a
shareholder’s debt waiver can also be business-related,
provided the waiver is made at arm’s length with regard to
other creditors.
A distinction is made between conditional and unconditional debt
waivers. A conditional debt waiver depends on either a condition
precedent or a condition subsequent, while a waiver not subject to
any of these conditions is called an unconditional debt waiver.
Waivers subject to a condition precedent are only effective once
the condition precedent is fulfilled, whereas waivers subject to a
condition subsequent (usually being a recovery agreement) are
generally immediately effective.
Income tax aspects
At the level of the shareholder or a third party, a debt waiver
subject to a condition subsequent (being a recovery agreement) does
not lead to the elimination of the claim, because the claim under
the recovery agreement (constituting a separate economic asset)
replaces the former claim. The value of the latter claim may be
depreciated to the current value.
“Austrian tax law provides various reorganisation tools
for companies in an economic crisis.”
At the level of the company, debt waivers subject to a condition
subsequent are only recognised as income once repayment of the
claim is highly unlikely.
At the level of the shareholder regarding debt waivers made by
shareholders, a depreciation in the amount of the non-recoverable
part of the claim must be made, provided that only the recoverable
part of the claim is included in the balance sheet as capital
reserve. However, if the shareholder is a corporation, the
depreciation is to be prorated over seven years. As regards
indirect debt waivers, the prohibition of the depreciation pursuant
to Section 12 (3) (3) of the CITA must be taken into account (see
1.).
At the level of the company with respect to debt waivers made by
shareholders, the disposable evidence sub-account is to be
increased in the amount of the recoverable part of the claim. The
non-recoverable amount of the claim qualifies as taxable income
that increases the internal financing.
Reorganisation profits as defined by Section 23a of the CITA
arising out of such debt waivers in connection with the conclusion
of a reorganisation plan can be subject to a tax benefit if there
is a need, intention and ability to reorganise (rarely applied in
practice due to the strict prerequisites of Section 23 of the
CITA).
- Letter of comfort
A letter of comfort is typically issued from the parent
(so-called patron) company towards the creditor of the parent’s
subsidiary (external letter of comfort) or directly from the parent
company towards the subsidiary (internal letter of comfort).
Additionally, letters of comfort can be drafted as “soft”
and “hard” letters of comfort (hybrid forms are
possible).
Soft letters of comfort again appear in two sub-forms:
(i) completely non-binding statements (declarations of goodwill)
are merely intended to strengthen the creditor’s
confidence;
(ii) legally binding promises of use (as defined in Section 880a
of the Austrian Civil Code), which normally establish an obligation
for the patron to make careful endeavours.
“Particularly in these challenging times companies
should be aware of all available reorganisation
tools.”
Hard letters of comfort constitute legally binding declarations
by the patron to provide its subsidiary with sufficient financial
resources. Such hard letters of comfort are concluded between the
patron and the subsidiary’s creditor. However, the creditor
does not have a claim for direct payment from the patron to the
creditor, but only a claim for the patron providing the subsidiary
with sufficient financial resources. The patron can be made liable
to pay damages to the creditor directly only in the event of a
breach of this obligation. Economically speaking, such hard letters
of comfort can be qualified as a conditional loan from the patron
to the subsidiary. Under Austrian civil law, a hard letter of
comfort is usually qualified as a guarantee. In contrast to
sureties pursuant to Section 1346 ABGB there is no formal
obligation. Generally, a hard letter of comfort is usually granted
between affiliated companies. Letters of comfort between third
parties are unusual.
Income tax aspects
At the level of the shareholder, the hard letter of comfort in
the form of a conditional loan commitment represents a contingent
liability as long as it is not likely that the patron is claimed.
At the time the loan is made available to the subsidiary, a
corresponding loan receivable must be included in the balance
sheet, which may have to be depreciated to its attributable
value.
The hard letter of comfort may also be granted in the form of a
voluntary (conditional) contribution (see 1.). In accordance with
the capital contribution by the subsidiary’s parent (i.e.
patron), a possible depreciation is to be prorated over seven
years.
At the level of the company, hard letters of comfort in the form
of a voluntary (conditional) contribution result in an increase in
the deposit register account (Einlagenevidenzkonto) as defined in
Section 4 (12) of the CITA.
Stamp duty aspects
Hard and soft letters of comfort are generally not qualified as
stampable transactions. According to the view of the Austrian tax
authorities, they cannot be qualified as a stampable surety
pursuant to Section 33 TP 7 of the Austrian Stamp Duty Act because
the creditor does not have a claim for direct payment from the
patron. If, however, such direct payment is agreed on, the
respective letter of comfort may be qualified as a stampable surety
and may therefore be subject to stamp duty at a rate of 1% of the
liability amount.
- Profit participation rights
Profit participation rights (“PPRs”) are basically
contractual obligations without membership rights. PPRs can be
securitised or non-securitised. The issuance of PPRs in stock
corporations is only possible based on a qualified resolution of
the shareholders’ meeting by a majority of three quarters of
the share capital represented at the meeting. According to the
prevailing opinion in legal writing, this requirement does not
apply to the issuance of certain PPRs that merely provide for a
profit- related interest. Moreover, the board of directors may be
authorised to issue PPRs for up to five years. To avoid dilution of
the shareholders, they are generally entitled to a subscription
right. This provision also applies to LLCs as issuers of PPRs.
Income tax aspects
At the level of the holders of PPRs, as regards share-like PPRs
(Substanzgenussrecht) the CITA requires both a participation in the
profit and the losses with respect to the profit as well as the
liquidation gain. Moreover, a participation in the hidden reserves
is required. For tax purposes, a participation in the economic
success of the “entire” company is necessary. Due to the
wording of the law, the prevailing opinion in legal writing denies
the necessity of loss sharing. According to other opinions,
however, such loss sharing may in fact be required. If the holder
of PPRs is a corporation, the depreciation of a PPR is to be
prorated over seven years.
At the level of the company, the qualification of PPRs for tax
purposes also depends on the above-mentioned criteria. For tax
purposes, PPRs as a contribution increase the surrogate capital
sub-account (Surrogatkapital-Subkonto), being a type of evidence
sub-account. If the issue price of the PPR capital exceeds the
nominal value, the excess amount (agio) must be accounted for on
the evidence sub-account.
If the PPR does not fulfil the prerequisites regarding
share-like PPR (equity instrument), a PPR would constitute an
ordinary debt instrument (obligationsähnliches Genussrecht).
In this case, the tax treatment at the level of the holder and at
the level of the company correspond to the tax treatment of an
ordinary loan.
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.