SAC: transfer of tax labilities by operation of law possible in spin-offs

Contrary to its previous case law, the Supreme Administrative Court agreed to the possibility of tax labilities being transferred by operation of law also in demergers by spin-off, when the company being demerged is not dissolved. The court cited a change in legislation as at 1 January 2014.

At the end of 2018, the Supreme Administrative Court (SAC) issued judgement Afs 314/2018 – 33, adding it to its case law. The court dealt with the specific situation of a company being demerged by spin-off connected with acquisition by another company, and the question whether a specific tax liability may pass on to the successor company after the demerger process is completed. The SAC concluded that the tax liability is indeed passed on (transferred by operation of law) to the successor company.

In this article, we focus on the transfer of tax liabilities by operation of law upon demerger by spin-off, without commenting on the details of the specific tax liability.

The judgement is based on the interpretation of Section 240b(1) of the Tax Procedure Code as amended as at 1 January 2014, following the recodification of civil and commercial law. Although the explanatory report on the amendment to the Tax Procedure Code states that new Section 240b takes over the existing regulation with no major changes, the amendment did change the original provision. Based on these changes, the court deduced the possibility of a tax liability passing on to the successor entity, deviating from its previous case law under which such liabilities were only transferred by operation of law in demergers by split-up. The judgement mentions neither any specific changes nor any detailed arguments supporting its conclusion.

Please note that this is yet a singular judgment, dealing with a very specific situation; it is therefore impossible to say how widely its conclusions will be applied. However, we recommend addressing this issue in contractual documentation and prospectuses for mergers and acquisitions.

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