Utilization of loss carryforwards and tax assets in international transactions – opportunities and risks using Austria as an example

published on 27 March 2024 | reading time approx. 4 minutes

In international transactions with loss-making companies, certain taxation regimes can be used (in this case Austria) to consolidate and secure loss carryforwards. Depending on the structure of the purchase price mechanism, the tax asset can also lead to an increase in the purchase price.

In transactions, the question often arises as to how the interaction of loss carryforwards and loss utilization options works in the tax context and how tax assets are to be evaluated in this context and may influence the purchase price. It becomes even more exciting in cross-border cases and when it comes to the cross-border use of losses.

The case presented here concerns Austria (parent company) and Germany (subsidiary company). The transaction is to result in a 100% change of shareholders. The German subsidiary has considerable loss carryforwards, as does the Austrian shareholder. In Austria, the parent company has applied for group taxation, so that German loss carryforwards have been included in the Austrian parent company's loss assessment.

Within the framework of Austrian group taxation, losses of foreign group members can be offset or carried forward against Austrian profits. The foreign losses must be determined in accordance with Austrian principles, i.e. converted. As soon as the loss carryforwards can be used abroad, the foreign loss carryforwards used in Austria must be retaxed in the corresponding amount.

In the context of due diligence, two questions need to be examined particularly:

Can the loss carryforwards in Germany and Austria be used by the acquirer in the future? (tax topic)
How should the tax asset on the loss carryforwards be evaluated and can it become a value-forming factor in the purchase price? (financial topic)

(1) Loss utilization option

a) Germany

Under German law, loss carryforwards can be carried forward indefinitely. The principles of minimum taxation must be observed when utilizing losses.

From a German perspective, however, the loss carryforwards are lost in accordance with section 8c German Corporate Tax Act (Körperschaftsteuergesetz – KStG) if there is a direct or indirect change of shareholders of more than 50%, as planned in the case at hand. Possible exceptions are the hidden reserves clause or the restructuring clause, which should not apply due to the lack of hidden reserves and the restructuring requirements at the German subsidiary. The only remaining option is the application of the loss carryforward tied to continuation in accordance with section 8d KStG. However, the possibility of using the loss carryforwards under this special regulation is subject to many conditions, so that there is a high risk for the acquirer of losing the loss carryforwards.

Interim result from a German perspective:

There is a high risk of losing the loss carryforwards in Germany.

b) Austria

Loss carryforwards can also be carried forward indefinitely in Austria, but a maximum of 75% can be offset against current profits (loss offset limit).

In the event of a change of shareholders, the principles of a shell company purchase (Mantelkäufe) must be observed. In contrast to the German regulations, in Austria it is important to maintain the identity of the corporation. An identity is lost, for example, if there is a significant change in

the direct shareholder structure (on a remunerated basis),
the organizational and
the economic structure.

In principle, the requirements must be fulfilled cumulatively, whereby the overall picture of the circumstances must also be taken into account.

A significant change in the shareholder structure on a remunerated basis is given if more than 75% of the previous structure is changed.

A change in the organizational structure is given if the governing bodies of the corporation are changed in their management and administrative functions. A significant change is deemed to have taken place if all or the vast majority of the members of the management are replaced in one go or, if there is an internal connection, successively. Only the persons who actually manage the business are to be taken into account.

A change in the economic structure is given if the economic unit formed by the assets and activities (in relation to all previous areas of activity) of the corporation is lost.

After assessing all the overall circumstances, the identity of the corporation should not be lost in this exemplary case.

Interim result from an Austrian perspective:

The loss carryforwards in Austria can be saved if the facts of the case are structured accordingly. In principle, this also applies to the German loss carryforwards that are included due to the group taxation applied for in Austria, regardless of the fact that the loss carryforwards are lost for German tax purposes. This also eliminates the risk of subsequent taxation of the German loss carryforwards in Austria due to the lack of utilization possibilities in Germany.

c) Advice on structuring:

The consolidation of international losses to an Austrian corporation via group taxation can also be used in the event of a transaction to secure loss carryforwards that are lost abroad.

(2) Tax asset on loss carryforwards, evaluation and consideration in the purchase price

a) Tax asset

If loss carryforwards can be utilized, this will result in future tax savings that can be taken into account via a tax asset in the local financial statements of the company utilizing the loss.

b) Evaluation of the tax asset

When evaluating the tax asset, deferred utilization and, if applicable, other local circumstances must be taken into account by means of appropriate discounting. Further deductions must be made if the utilization of losses is completely in question, e.g. because no profits will be generated in the foreseeable future or the identity of the corporation could possibly be lost in the future due to planned restructuring (Austria case).

c) Consideration in the purchase price

Depending on the purchase price regulation, the tax asset may also be relevant to the purchase price. The purchase price is usually reconciled from the enterprise value to the equity value using a so-called equity bridge. The definition of the equity bridge, in particular the differentiation between net debt and working capital as well as the determination of the target working capital, is of great importance.

The tax asset can represent a cash-like item in this system due to the loss carryforwards, which can lead to an increase in the purchase price.

The final consideration depends on the negotiating skills of the individual contracting parties and their assessment of whether loss utilization is considered realistic or not.