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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.
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.
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.
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.
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.
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.
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).
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.
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.
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 ("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.
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.
authors: Roman Perner, Marco Thorbauer, Tobias Hayden, Clemens Grassinger, Benedikt Gröhs, Franz-Georg Oberlercher