Dr. Sonja Kerschbaum

1. The Austrian aspects of the transfer of clientele • Dr. Sonja Kerschbaum • 13.Febuary 2014 • BUDAPEST

2. STRUCTURE • General requirements of transferring a clientele/contract design • Clientele assessment and pricing • Fiscal and financial impacts • Diversification and minimisation of risks • Contact details

3. General requirements of transferring a clientele / contract design (1) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • transfer by asset deal • purchase of mostly intangible assets • Contract design has to consider: • Adequacy of transfer conditions, i.e. freelancers must not transfer the clientele on conditions that endanger their professional independency • Handling the obligation to confidentiality, i.e. client data and even client names must not be revealed without clients’ permission • contract should be made anonymous regarding personal client data and focus on turnover, number of clients etc.

4. General requirements of transferring a clientele / contract design (2) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Transfer of office name? • Transfer of half done works • as far as works are done, but not yet invoiced, the corresponding claim should remain with the transferor • half done works need to be taken on by the purchaser; it therefore is necessary to add a detailed list of started works including a declaration of completeness • Competition clause • prohibition of new establishment or client protection clauses have to be sensibly restricted regarding subject, regional and temporal extension (2 years should be uncontroversial) • Payment arrangementsusually deposit on transfer date and unpaid balance within one year after transfer date

5. General requirements of transferring a clientele / contract design (3) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • If so, indication of a target turnover • Transfer of contractual relationships under the law of obligations • transfer itself is effected ipso jure and cannot be waived (e.g. employees) • for the sake of clarification the contract should list up all contractual relationships taken in by the purchaser (e.g. rental agreements, risk: higher rent) • transfer of mandates needs to be effected by the contract • it therefore is mandatory that the clients declare to be willing to be serviced by the transferee henceforward • Arbitration clause • appeal at competent trade association (e.g. chamber of tax consultants) in case of controversies • should intermediation fail, an arbitral court can be appealed at instead of ordinary courts

6. General requirements of transferring a clientele/ contract design (4) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • statutory liability provisions to be considered • § 38 UGB (Business Entrepreneurs Act) • § 1409 ABGB (Austrian Civil Code) • § 14 BAO (Federal Fiscal Code) • § 67 ASVG (General Social Insurance Act) • § 6 AVRAG (Employment Law Harmonization Act)

7. Clientele assessment and pricing (1) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • value of freelancer’s office in general is comprised of • net asset value and • Goodwill • net asset value is easy to assess: material assets such as office equipment, outstanding debts or specific commitments of the transferor • Valuation of net assets at current market value • goodwill embodies profit prospects excelling the net asset value primarily resulting from the clients’ confidence in competence and capability of the freelancer • Net asset value approach is inappropriate • Relevancy of many factors depending from the individual case • Most relevant factor is “fair value” of the clientele, i.e. its objectively imputed value • Assessment of fair value by estimating net present value of future profits achievable from the clientele using the transaction value approach

8. Clientele assessment and pricing (2) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Decisive parameter: annual percentage sales that can be allotted to the clientele to be assessed • Step 1 • determination of average net annual sales of the last three years (the most current year should be assessed twice) • deduction of extraordinary earnings (i.e. earnings being connected with the person of the previous proprietor) • Step 2 • multiplication of these average net annual sales with a multiplier factor in order to assess the goodwill in the strictest sense

9. Clientele assessment and pricing (3) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Multiplier factor can be ascertained by: • Attractiveness of place of business • Earning position/cost structure • Current development of earnings • Continuity of mandates • Duration of existence of office • Bad health/condition of transferring freelancer • Extent of office initiated costs • Potential of increasing fee level • Growth of mandates/long-standing clientele • Accessibility of new consultancy segments • Mandatories´ structure (fair balance or dependence on major mandates?) • Department portfolio of mandatory • Competitive situation • Degree of specialisation

10. Clientele assessment and pricing (4) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Know how and turnover of employees • Office’s reputation • (in-)auspicious rental agreements • State of technical appurtenance/office organisation

11. Clientele assessment and pricing (5) Ursprung und Ausgangspunkt der AIFM-Richtlinie/des AIFMG Adressaten des Gesetzes Wesentliche Inhalte Umsetzung in anderen Ländern EU-Pass Bedeutung aus Investorensicht Ansprechpartner Standorte Kontaktdaten General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Multiplier factors lie within the range of 50 and 130 per cent in connection with transfer of clientele • A frequently used multiplier factor is 0.8 (respectively 1.0 to 2.0 as far as tax advisors’ or public auditors’ clienteles are acquired) • Step 3 • diverse final steps in the calculation • Consideration of attrition rate • Deduction of virtual leasing rates for the rest of assets participating in the production process • Deduction of accrued interest of value calculated that way over anticipated average life • Addition of cash value of possible tax benefit

12. Clientele assessment and pricing (6) Ursprung und Ausgangspunkt der AIFM-Richtlinie/des AIFMG Adressaten des Gesetzes Wesentliche Inhalte Umsetzung in anderen Ländern EU-Pass Bedeutung aus Investorensicht Ansprechpartner Standorte Kontaktdaten General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Simplistic sample calculations: • Example 1 (clientele of international law firm):

13. Clientele assessment and pricing (7) Ursprung und Ausgangspunkt der AIFM-Richtlinie/des AIFMG Adressaten des Gesetzes Wesentliche Inhalte Umsetzung in anderen Ländern EU-Pass Bedeutung aus Investorensicht Ansprechpartner Standorte Kontaktdaten General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Simplistic sample calculations: • Example 1 (clientele of international law firm):

14. Clientele assessment and pricing (8) Ursprung und Ausgangspunkt der AIFM-Richtlinie/des AIFMG Adressaten des Gesetzes Wesentliche Inhalte Umsetzung in anderen Ländern EU-Pass Bedeutung aus Investorensicht Ansprechpartner Standorte Kontaktdaten General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Simplistic sample calculations: • Example 2 (clientele of single lawyer):

15. Clientele assessment and pricing (9) Ursprung und Ausgangspunkt der AIFM-Richtlinie/des AIFMG Adressaten des Gesetzes Wesentliche Inhalte Umsetzung in anderen Ländern EU-Pass Bedeutung aus Investorensicht Ansprechpartner Standorte Kontaktdaten General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Simplistic sample calculations: • Example 2 (clientele of single lawyer):

16. Fiscal and financial impacts (1) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Income tax • Capital gain on disposal of clientele is not an compensation in the meanings of Art. 32 Austrian Income Tax Act (ITA) • Capital gain on transfer of clientele is sale of business in the meaning of Art. 24 par. 1 No. 1 ITA due to the obmission of an essential business base • subject to income tax as capital gain from transfer • Art. 24 ITA is also applicable, should not the whole clientele agree to the transfer to the purchaser; but if the transferor willfully reserves part of the clientele, it will not be a sale of business in the meaning of Art. 24 ITA • General income from trade and business, Art. 23 No. 1 ITA

17. Fiscal and financial impacts (2) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Income tax • Should the clientele not embody the essential business base, Art. 24 ITA is not applicable as well • Concerning freelancers, it is acknowledged that clientele embodies the sole essential business base • Tax exemption, if capital gain on disposal less than EUR 7,300 • In case of amortisation of undisclosed reserves individual persons are allowed to depreciate them from acquisition and manufacture costs of capital assets produced or acquired in the respective business year

18. Fiscal and financial impacts (3) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • VAT • Clientele as part of the office’s value (“Praxiswert”) as uniform commodity • Clientele can be transferred apart from the office´s value • Is equated with the transfer of the clientele itself • controversy: Does transfer of clientele represent • a delivery or • any other performance?

19. Fiscal and financial impacts (4) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • VAT • In the matter “Swiss Re” the ECJ decided that transfer of life reinsurances is not a delivery in the meaning of the VAT law • German financial administration reacted to this decision by amendment of VAT Application Decree in that transfer of immaterial assets generally represents “any other performance” • Austrian financial administration still takes a different view, i.e. transfer of clientele as a delivery in the meaning of Art. 3 par. 1 Value Added Tax Act (VATT) with possibility of VAT exemption

20. Fiscal and financial impacts (5) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Reflection on balance sheets • Clientele is an independent depreciable asset in the meaning of Art. 4 ITA as soon as the former proprietor does not participate in the purchased freelancer´s business any more • As long as he participates, the clientele is a non-depreciable asset, because value´s volatilisation as result of transfer does not occur in that case • Transferee has to activate expenses for the purchase of clientele • Acquisition costs are to be allotted over the absorbed commodities in proportion to the value of an asset as part of an enterprise following objective standards of valuation • As far as the acquisition costs excel the values of assets as part of an enterprise, this surplus has to be activated as derived office´s value • An original office´s value must not be activated! • Derived office´s value embodies a kind of undisclosed reserve of the office in total

21. Fiscal and financial impacts (6) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Reflection on balance sheets • Depreciation: • Due to quick value´s volatilisation after transfer of clientele a trienial or at most a quinquennial useful economic life is generally thought fit for tax depreciation of acquired and depreciable office´s value • In case of a non-depreciable office´s value a depreciation over fifteen years is possible (Art. 8 par. 3 ITA) • In the commercial balance sheet depreciations have to be allotted in a scheduled manner over the expected useful lives • As far as the acquired clientele is part of the capital assets for more than six months of a business year, the total annual amount can be depreciated (failing this, the half) • In case of omission of an essential part of the clientele current-value depreciation is possible

22. Diversification and contractual minimisation of risks (1) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • risk 1: transferor’s default risk in case of deposit on transfer date and unpaid balance within one year after transfer date and transferee’s risk of lack of clientele’s maintaining value, i.e. transferred clientele is not as profitable as expected • Risk takers: both parties • Possible solutions: • opening a notarial trust in order to place unpaid balance at once • “melting clauses”, i.e. transferor temporarily accepts reduction of purchase price depending on missing transfer of mandates being followed by failure to achieve target turnover • Price reduction/rescission clauses • risk 2: deferred payment • Risk taker: transferor • Possible solutions: • Risk insurances • bank guarantees • prohibitions on resale before total payment

23. Diversification and contractual minimisation of risks (2) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • risk 3: loss of confidence in case of failed transfer • Risk specification: • transferor has to inform clients in advance in order to gain their approval of transfer • Should transfer fail afterwards, transferor was forced to rebuild trust in his reliability • Risk taker: transferor • Possible solutions: • Conclusion of transfer contract under the suspensive condition of clients’ granting consent • Short-time joint-practice • background: clients of joint-practices have to reckon with changes in personnel, so their approval of transfer can be dispensed in that case

24. Diversification and contractual minimisation of risks (3) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • risk 4: continuation of liability • Risk specification: professional having carried out the consultancy service giving rise to liability remains liable even after transfer of his clientele • Risk taker: transferor • Possible solution: indemnifying clause, i.e. transferee holds transferor harmless from any claims being on the ground of past misconduct • “quid pro quo”: lower purchase price

25. Diversification and contractual minimisation of risks (4) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • risk 5: transferee’s original risks of liability • Risk specification: • In general, obligatory transition of liabilities existing in the moment of transfer (Art. 1409 Austrian Civil Code) • Liability for operational tax debts, as far as tax liability arose since the beginning of the last business year before transfer of clientele • Liability for unbalanced social security contributions • Assumption of rights and obligations as policyholder • Risk taker: transferee • Possible solution: contractual recording on possible tax arrears and if so, regress clauses

26. Diversification and contractual minimisation of risks (5) General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details SUMMARY: • The widest possible offsetting of diverse risks with an according pricing is a great challenge to contract design.

27. Contact persons General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details Dr. Sonja Kerschbaum A 1030 WIEN, Am Heumarkt 7/19 T +43 1 718 00 35-557, F +43 1 718 00 35-828 E sonja.kerschbaum@kpra.at

28. General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details ┐ Linz ┌ Vienna AUSTRIA

29. General requirements of transferring a clientele/contract design Clientele assessment and pricing Fiscal and financial impacts Diversification and minimisation of risks Contact persons Locations Contact details • Kerschbaum Partner Rechtsanwälte GmbH A 1030 WIEN, Am Heumarkt 7/19 T +43 1 718 00 35, F +43 1 718 00 35-828, E office@kpra.at • Kerschbaum Partner Rechtsanwälte GmbH A 4040 LINZ, Ottensheimer Straße 36 T +43 732 73 03 69, F +43 732 73 03 69-816, E office@kpra.at www.kpra.at To ensure that the advice given is already coordinated between attorneys and tax advisers we cooperate with

30. THANK YOU VERY MUCH FOR YOUR ATTENTION! I will be happy to answer all your questions!