On 16 April 2015, Advocate General Kokott („AG“) advised the CJEU to rule that the exclusion of foreign EU group members of an Austrian tax group from the goodwill amortization scheme is not in line with the freedom of establishment. The AG, furthermore, argued that the scheme does not constitute illegal State aid due to the lack of selectivity.
Treaty Freedoms vs. State Aid Rules
The case Finanzamt Linz vs. Bundesfinanzgericht, Außenstelle Linz (C-66/14) is expected to result in a landmark decision of the CJEU. The importance of the case is that it deals with an Austrian tax regulation which may simultaneously infringe the freedoms of the treaty (freedom of establishment) and the state aid rules of the EU.
The mentioned combination of conflicts brings up fundamental questions, i.e. the interaction between treaty freedoms and state aid rules. The issues gives rise to a potential conundrum because in the context of alleged “aid” in relation to domestic transactions, the respective remedies for unlawful state aid and the breach of freedoms are, in effect, opposites. Unlawful state aid has to be repaid which – in the given situation – results in a non-application of the goodwill amortization scheme. However, the scope of a discriminatory rule has to be extended which would require the amortization scheme to be applied to all investments (domestic and foreign targets). The solution for this conflict cannot be derived from the already existing case law of the CJEU. Tax experts were therefore looking forward to the opinion of AG Kokott which is laid down in the following.
Facts and Circumstances
Group taxation system
The Austrian Corporate Income Tax Act (KStG) offers legally independent companies belonging to a group of companies the opportunity to form a tax group, with the result that the income of all tax group members is taxed in an added up way at the level of the group parent. This has the effect that the income of all group members is taxed in the hands of the parent company of the tax group. The main requirement for two or more companies to establish a tax group is that the group parent company holds an investment in the subsidiaries of more than 50%. Also foreign companies can take part in the tax group, if they are directly owned by a domestic group member. Therefore only first-tier foreign subsidiaries may become members of a tax group. The tax group scheme provides for the attribution of 100% of profits/losses of a domestic group member to the group parent even though the actual participation might be lower. In the case of foreign group members only losses are attributable to the parent company according to the percentage of the participation. There is a recapture of taxes when the foreign losses are set off against profits abroad in subsequent years or if the foreign group member ceases to be a group member.
Fore share acquisitions prior to March 2014, tax groups could amortize the goodwill resulting from the purchase of Austrian group members with an active business. Following this scheme the goodwill inherent in the acquisition cost was amortized on a straight-line basis over a period of 15 years. In order to avoid constitutional concerns goodwill that resulted from acquisitions prior to March 2014 and which has not fully been amortized upon March 2014, can be further amortized if the possibility of the goodwill amortization had an impact on the purchase price of the participation. As the goodwill amortization was limited to domestic participations, foreign EU group members were excluded from the scheme.
An Austrian taxpayer (a tax group which acquired a non-privileged Slovak subsidiary) concerned by the goodwill amortization started a litigation process, because under its opinion it infringed the freedom of establishment. The court of first instance (=Federal Tax Court Linz) in its decision on 16 April 2013 followed the taxpayer’s argumentation, classified the Austrian goodwill amortization as being not in line with the freedom of establishment and extended the goodwill amortization also to foreign group members. After the Austrian tax office involved has appealed against this decision, the Austrian Administrative High Court (VwGH) referred two questions with regard to the goodwill amortization scheme for preliminary ruling to the CJEU. The Court raised the question whether (a) the scheme constitutes illegal State aid for the beneficiaries of the scheme as defined under Article 107 TFEU and (b) the exclusion of foreign EU group members from the scheme was in line with the freedom of establishment.
Opinion of the AG
Freedom of establishment
According to AG Kokott the exclusion of foreign EU group members from the amortization scheme restricts the freedom of establishment. Since the AG found the domestic and the cross-border scenario comparable, she examined whether there was any justification for limiting the amortization scheme to just domestic targets. The representatives of the Austrian Government argued that the exclusion of foreign participations is required in order to maintain the coherence of the Austrian tax system. They based the coherence argument on the fact that under Austrian corporate income tax law capital gains from domestic participations are taxable and therefore the goodwill amortization provides a temporary liquidity advantage only, while capital gains from foreign participations are, in most cases, tax exempt with the requested goodwill amortization resulting in a permanent tax advantage which was not the intention of the Austrian lawmaker. The AG rejected this justification on the grounds of the coherence of the Austrian tax system because the goodwill amortization scheme was even not open to taxpayers who opted for tax liability of their participations in foreign EU group members according to § 10 Par 3 Nr. 1 KStG. Since there were no other justification grounds the AG came to the conclusion that the goodwill amortization scheme infringes the freedom of establishment.
State aid assessment
- The concept of selectivity
With regard to the State aid assessment the AG argued that the goodwill amortization confers a tax advantage for its recipients pursuant to Art 107 para 1 TFEU. The advantage was also granted through state resources. For the selectivity test of the measure the AG modified the traditional selectivity examination scheme, where one has to first identify the “normal” taxation approach (“derogation approach”). As the referring Court suspects that the different treatment of (a) companies and individuals, of (b) companies within a tax group and outside a tax group and of (c) companies which acquire domestic participations and companies which acquire foreign participations might be selective, one “normal” tax regime cannot be identified. Therefore it is solely important whether comparable legal and factual situations are treated differently and whether this different treatment leads to a selective advantage for certain industries or undertakings (“comparability approach”). The argumentation of the AG is in line with the present case law of the CJEU, which considers the selectivity examination also as an examination of comparability. For example in the Gibraltar judgement the CJEU classified a tax-exemption to offshore companies as selective, even though less than 1% of companies were actually taxed.
- Assessment of the goodwill amortization scheme
According to the AG the refusal to grant the goodwill amortization to individuals and to companies which are not part of a tax group cannot be considered to be state aid, since these persons are not in a comparable factual and legal situation with companies, which are members of a tax group. The AG suggests a less stringent comparability test for pure domestic situations as compared to cross-border situations. This is due to that fact that only unfavorable treatment of cross-border cases compared to domestic cases are covered by the EU Treaties.
AG Kokott then states that the goodwill amortization scheme, by excluding foreign EU group members, treats taxpayers in comparable legal and factual situations differently. Consequently the goodwill amortization constitutes an advantage to companies, which acquire domestic participations, compared to companies which acquire foreign participations. This unequal treatment is not justified by the basic or guiding principles of the Austrian tax system. Therefore the goodwill amortization scheme can be regarded as a subsidy in the narrow sense (which cannot be justified by the basic or guiding principles of the Austrian tax system).
However, as the scheme covers all sorts of domestic companies, it does not favor certain industries or undertakings and therefore it is not qualified as being selective. The advantage is rather that all companies within a tax group irrespective of the economic sector they perform, receive a subsidy for acquiring domestic participations. With this reasoning the AG follows the view taken by the European Court of First Instance in two cases regarding the Spanish goodwill amortization (Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10). There the Court concluded that the granting of a goodwill amortization only in relation with the acquisition of foreign participations was not selective since the scheme was in principle open to all companies and did not exclude a specific group of undertakings. In order to confer a selective advantage, a tax rule would have to characterize the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category. The mere fact that the tax rule/benefit is subject to conditions could not, alone, render it selective in favor of undertakings satisfying this conditions. Otherwise, any tax relief subject to conditions would be state aid. The AG furthermore argues that a too broad understanding of the terms ‘certain undertakings’ and ‘production of certain goods’ and ultimately ‘selectivity’ entails the risk to affect the distribution of competence between Member States and the EU as foreseen in Art 2 to 6 TFEU as well as between the European Parliament/Council of the European Union (Art 14 TEU) and the European Commission (Art 17 TEU). Consequently, the AG came to the conclusion that the goodwill amortization scheme does not constitute illegal State aid.
The opinion of the AG provides an important indication on how the CJEU could qualify the Austrian goodwill amortization scheme. It is expected that the CJEU will render its decision still in 2015.
Until then, Austrian tax groups with foreign EU group members, which were purchased before 1 March 2014 and where the holding company exercised the option for tax liability according to § 10 Par 3 Nr. 1 KStG should, if not already done, examine their tax positions and assess whether they could benefit from the goodwill amortization scheme or not. The prerequisite that the goodwill amortization had to have an impact on the purchase price of the participation is also likely to infringe the freedom of establishment and should therefore not prevent tax groups from obtaining the goodwill amortization for their foreign EU group members.
 In 2014 the goodwill amortization concept was abolished for new acquisitions due to the possible infringement of EU-law.
 Federal Tax Court (former „UFS“, now “Bundesfinanzgericht”) Linz, 16 April 2013 (RV/0073-L/11).
 Austrian Administrative High Court, 30 January 2014 (Zl. 2013/15/0186).
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 61.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 69.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 88.
 Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 91.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 104.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 111.
 Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10.
 Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.
 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 117.