Investment in Progress
One of the most frequently asked questions posed by start-up-founders & investors:
During the start-up phase, potential young entrepreneurs are often faced with the question of how to deal with business expenses that incur before the founding of the company. On the one hand, the question arises if preparatory expenses are tax deductible at the level of the company to be created in the future and, on the other hand, whether any input VAT can be claimed. Apart from that, it also needs to be analyzed how to deal with developed intangible assets.
In this context, the following aspects could be considered depending on the phase of the project:
a.) Allocation of costs to the future company
A GmbH – in the form of a pre-foundation company – is already regarded as a tax subject before it is entered in the commercial register (articles of association have been concluded and an externally recognizable activity is carried out [eg opening a bank account, etc]). However, even before this phase business expenses may incur.
In this context the Austrian tax authorities admit that preparatory expenses could be allocated to the company yet to be founded under certain conditions. Upfront services to the so-called pre-foundation company (up to the conclusion of the articles of association) can be attributed to the future GmbH if they were rendered within a reasonable period of time before the conclusion of the articles of association. In the CIT Guidelines the Austrian tax authorities point out, that the period covers approximately three months. As a consequence within that period input VAT (provided that the invoices are issued correctly) and CIT tax deduction can be claimed once the company is established.
b.) cost recharging
If significant costs have already been incurred at an earlier stage (significantly more than 3 months ago) and the respective costs have not yet led to the creation of an intangible asset, a cost recharging would be thinkable. The expenses incurred at the level of the founder are therefore recharged to the company after its establishment. However that approach basically triggers a tax registration of the founder and any company law aspects need to be coordinated in advance.
c.) restructuring measure
If significant costs have already been incurred at an earlier stage and significant valuable intangible assets have already been created prior to the formation that are to be transferred to the future GmbH, a contribution in kind (“Einbringung”) within the meaning of the Reorganization Tax Act would have to be considered in order to avoid a taxable realization. Under certain conditions (eg in particular the transfer of a [partial] operation) a tax neutral transfer would be possible, however this would need to be analyzed on a case-by-case basis.
In order to avoid an awakening of evil, tax considerations should therefore be taken into account at an early stage in the (pre)formation phase.