Austria: Draft Grace-Period-Act facilitates SME succession within the family

Background and intention

Traditionally, most Austrian businesses are SMEs, often transferred and continued within the family over generations. Against this background, the Austrian government seeks to simplify the process of transferring businesses between family members and enhance legal certainty regarding the tax implications arising from periods preceding the transfer or from the transfer itself.

Supervision by Austrian tax authorities

In case of business transfers, successors often face uncertainties from a tax perspective. Among other things, this includes a potential liability for taxes incurred prior to the transfer of the business. Such uncertainty within the family is typically not intended by either the transferor or the transferee. To prevent negative tax consequences, the draft of the Grace-Period-Act provides for the possibility to be supervised and accompanied by Austrian tax authorities. In particular, this supervision foresees two main measures:

• Yet unaudited periods of the business can voluntarily be subject to a tax audit; and
• Austrian tax authorities are obliged to provide their view on facts and circumstances that have or have not been realised yet.

These measures are intended to increase legal certainty when planning business transfers.

Prerequisites for application

Supervision by Austrian tax authorities is feasible for business owners (individuals) who intend to transfer their business, including shares in certain partnerships, to family members within the meaning of Section 25 of the Fiscal Tax Act within the next two years. Additionally, certain formal application requirements must be met.

Initial tax audit and extended disclosure obligations

Besides containing elements of a tax audit upon request, the supervision of the business transfer also features elements of an accompanying audit, as already implemented for certain large businesses. Accordingly, is the parties involved will face an increased disclosure obligation, while the Austrian tax authorities will have an intensified communication and information obligation during such supervision of the business transfer.

As a result, businesses that were supervised under these new provisions will be excluded from tax audits for the respective covered periods.

Other aspects

In addition to the outlined amendments in the Fiscal Tax Act, the Grace-Period-Act provides for certain facilitations in trade law and employment law.

The Grace-Period-Act is intended to enter into force on 1 December 2024.

Comment

Although the intention to support family businesses by enhancing legal certainty for unaudited tax periods prior to the transfer and for the transfer itself is a positive statement by the government towards family businesses in Austria, the draft of the Grace-Period-Act leaves several concerns and demands aside. Among others, the draft still does not deal with the following key aspects:

• Limited scope of application: The current draft of the Grace-Period-Act only applies to business transfers and certain shares in partnerships, which does not fully reflect the corporate structures of Austrian family businesses in practice.
• Mandatory tax audit: The mandatory initial tax audit may discourage families from applying for supervision of the business transfer by tax authorities.
• Criminal tax risk: As a criminal tax risk is not excluded in the case of application, a review of the business by legal and tax advisors before applying for supervision under the Grace-Period-Act would often still be required. In this regard, it is questionable if an application for supervision is useful at all.