Contributed By bpv Hügel Rechtsanwälte GmbH
Corporate businesses generally adopt the form of a company, as either a limited liability company (Gesellschaft mit beschränkter Haftung (GmbH)) or a joint-stock company (Aktiengesellschaft (AG)). Further corporate forms in which a business could be organised are the co-operative (Genossenschaft (Gen)) and the Societas Europeae (SE). Corporate entities are taxed as legal entities, and are subject to corporate income tax.
Whereas the GmbH is a private limited company, typically with a low number of shareholders, the AG is a public limited company, whose shares can be held as securities deposits of banks and can also be listed at the stock exchange. However, both forms of company can also be formed as a one-man company. In both cases, the liability of the shareholders is generally limited to the amount of the nominal capital allocated to their shares.
Under a GmbH, the shareholders are authorised to give instructions to a managing director, the transfer of shares can be restricted by the company statutes, and there is a wide range of possibilities for the design of the company statutes.
Under an AG, the supervisory board and the management board are mandatory, with both operating independently from the shareholders regarding the business decisions. There is a higher degree of organisational strictness and a high degree of fungibility of the shares.
The Offene Gesellschaft (OG) is a general partnership, with the partners having unlimited liability. The Kommanditgesellschaft (KG) is a limited partnership where at least one general partner has unlimited liability, while the limited partner’s liability is limited to their contribution. A common structure for a partnership is to use a company (GmbH) as the general partner of a KG, with the remaining partners (investors) being limited partners (GmbH & Co KG).
These partnerships are legal entities, but are treated as transparent for income and corporate income tax purposes. Apart from that, there exists a general partnership under civil law (Gesellschaft bürgerlichen Rechts), which is not a legal entity. The VAT treatment of partnerships depends on whether or not they engage with the public as entrepreneurs.
The investment fund business can be made either by an Undertaking for Collective Investment in Transferable Shares (UCITS) regulated under the UCITs V Directive, or in the form of an Alternative Investment Fund under the Act for Alternative Investment Fund Managers (AIFM), encompassing most private equity funds and hedge funds. An Alternative Investment Fund is defined as a vehicle that invests regularly on the basis of an investment concept for the benefit of its investors, regardless of its legal form and whether it is a closed or open construction, with the exception of industrial holding companies and single family offices, among others.
In Austria, AIFs are basically subject to the same taxation rules as investment funds regulated as UCITS. The fund itself is treated as transparent for income tax purposes and, as such, is not subject to income tax at fund level. A tax-free accumulating of proceeds is not possible at the fund level. Upon distribution to investors (or as deemed distributions at year end in case of accumulating funds), the components of the fund income are taxed in the hands of the investors, and (if applicable) capital yields tax is withheld by the bank on the taxable components of the fund income. Both Austrian and foreign UCITS and AIFs are obliged to have a fiscal representative, who is obliged to notify the composition of the annual fund income to the Austrian Control Bank. If the fund has not reported its income to the Austrian Control Bank, a lump sum taxation applies (100% of distributions, and the percentage of value increases as dividend equivalent proceeds at year end), unless the income of the fund can be proved otherwise by the investor(s).
A corporation is treated as resident under Austrian domestic tax law if it has its statutory seat or its place of management in Austria. The place of management is the place where the most important business decisions for the company are taken and prepared by its managers. If the seat and the place of management of the company are in different countries (ie, a dual-resident company), the company could be liable to unlimited tax liability in both countries.
If a double taxation convention applies, double taxation of dual-resident companies is avoided by the “tie-breaker rule”. According to most Austrian double taxation conventions, a dual-resident company would be regarded as resident in the contracting state where its effective place of management is located; Austria has not followed Article 4 of the MLI with its new rules for dual-resident companies.
If a company has its seat or place of management in Austria, it pays corporate income tax on all of its profits from Austria and abroad (subject to unilateral or bilateral double taxation relief – see 6.1 Foreign Income of Local Corporations). If a company is not based in Austria in the aforementioned sense but has an office or branch there, it only pays company tax on its profits from its activities in Austria.
Transparent entities (eg, partnerships, investment funds and certain foreign trusts) are not regarded as taxpayers in Austria. Their income is allocated proportionately to their partners, investors or beneficiaries, being individuals or corporations. Therefore, taxation of a transparent entity’s income depends on the residence of its partners being individuals or corporations that hold the interest either directly or indirectly via other transparent entities and the applicable double taxation convention.
The corporate income tax rate in Austria is 25%. There is an annual minimum corporate income tax of EUR1,750 for a limited liability company and EUR3,500 for a joint stock company.
The individual income tax rate is progressive, starting with 0% (EUR0-11,000) and increasing to 25% (EUR11,001-18,000), 35% (EUR18,001-31,000), 42% (EUR31,000-60,000), 48% (EUR60,001-90,000) and 50% (for annual income exceeding EUR90,000). A tax rate of 55% applies for annual income exceeding EUR1 million, until 2020.
Corporate income tax is paid by corporations, while individual income tax is paid by individuals operating a business as sole proprietor. Corporate income tax and individual income tax is also paid by companies and individuals, respectively, that hold an interest or share in a partnership or other transparent entity for the profits allocated to them from the partnership or other transparent entity.
Most corporations (especially companies and co-operatives) have to determine the profits based on the statutory accounts under generally accepted accounting principles (Austrian GAAP), adapted by book-to-tax adjustments as required by Austrian corporate income tax law. The main mandatory deviations provided for by tax law for the determination of profits by corporations is that losses from the sale of, or depreciations of participations in, other companies have to be spread over seven years (with only 1/7 being deductible each year from the corporate income tax base), dividend income is largely exempt from corporate income tax (see 6.3 Taxation on Dividends from Foreign Subsidiaries regarding foreign participations), and remunerations paid to supervisory board members are only deductible at 50%. Apart from these special deviations for corporations, the general tax provisions have to be observed – providing (among others) special provisions for the acceptance of accruals, car depreciation, the non-deductibility of representational expenses, the non-deductibility of expenses in connection with tax-exempt proceeds, the non-deductibility of (corporate) income tax, etc.
Individuals only have to determine their profits based on statutory accounts (in the aforementioned way) if their turnover exceeds certain thresholds (ie, EUR700,000 in two consecutive years). If the turnover does not exceed the thresholds, the individual can determine their profits based on a receipts basis (ie, he or she has to set up a revenue and expense statement) or optionally on an accrual basis for tax purposes only (except independent services).
Individuals who do not run an active business (ie, individuals with passive income like rental, real estate or investment income that does not exceed the scope of mere asset administration) always determine their profits on the basis of a revenue and expense statement.
Special rules apply to partnerships, whereby the partnership’s statutory accounts serve as the basis for the individual income tax returns of the partners’ income determination together with the special tax balance for each partner’s partnership interest.
There are no special patent box regimes in Austria. However, expenses for in-house research are fully tax-deductible. Additionally, there is a cash-premium for research and development expenses as far as it is exercised in Austria by Austrian corporations or Austrian permanent establishments of foreign corporations, amounting to 14%, which is unrestricted in the case of in-house research but restricted to expenses of EUR1 million in the case of contracted research.
If it is possible to integrate an Austrian company during the acquisition of an Austrian company, it is advisable/possible to deduct interest expenses incurred for the acquisition of the Austrian target company from the Austrian corporate income tax base of the Austrian acquiring company. By electing to form a (consolidated) tax group between the acquiring company and the target company in Austria, future operating profits of the target company are taxed at the level of the acquiring company, from which the interest expenses for the debt used for the acquisition of the target can be set off.
Whereas loss-offsetting is possible without restrictions in the case of business income, special rules apply for losses derived from investment income in the hands of individuals (eg, there is no loss-offsetting from interest income on banking deposits or from donations of private foundations and/or from non-investment income). The same applies for corporations that do not perform a business (eg, associations). Business corporations, however (ie, companies – AG ,GmbH) can set off losses without limitation.
The tax loss carry-forward – as in the case of individuals with “income from business activity” – is possible without any time limit. No carry-back of tax losses is available. In the case of non-business income, neither a carry-forward nor a carry-back of losses is admitted.
In the case of a corporation, the deduction of the loss carry-forward is limited to 75% of its annual taxable income, with the remaining losses remaining deductible in later periods, subject to the same 75% limitation; this shall safeguard an annual minimum taxation at the level of the company of 25% of its annual income.
As the tax-loss carry-forward is made at the level of the corporation, it is basically – unlike in the case of a partnership where the loss is proportionally allocated to the partners – possible to utilise tax losses at a company level irrespective of any shareholder changes, unless the so-called “change-of-ownership rules” apply. According to the “change-of-ownership rules”, tax-loss carry-forwards of a company are forfeited if a substantial change in the company’s shareholders occurs in connection with a substantial change in its business and management structure; special rules apply for the forfeiture of tax losses in the case of corporate reorganisations (see 5.4 Change of Control Provisions for more detail regarding change of control provisions).
There are no general interest barrier regulations in Austria, according to which interest expenses may only be deducted to a certain limit in groups of companies. There are also no statutory thin-capitalisation rules in Austria. However, the financing structure of an Austrian company must be at arm’s length, otherwise a re-qualification of debt into equity might take place. According to the case law of the courts, this requirement is met if equity is not out of relation with regard to the debt finance and is adequate to the economic situation of the Austrian company – ie, the lending would also have been granted by third parties. Moreover, interest income is deductible as a business expense only as far as its amounts are at arm’s length.
Interest expenses are not deductible if they relate directly to tax-exempt income. Interest expenses from debt raised to acquire exempt participations (ie, national participations or participations in foreign companies qualifying for the participation exemption) are deductible.
However, interest expenses for debt raised to acquire an exempt participation from an affiliated company are not tax-deductible.
Additionally, intra-group interest and royalties (ie, interest expenses or royalties paid to foreign affiliated companies) are non-deductible if the foreign receiving company is subject to low taxes (ie, less than 10%).
In Austria, a group taxation regime applies upon election, which allows parent companies and their Austrian subsidiaries to consolidate their taxable income at the level of the upper tier parent company (group head) for corporate income tax purposes. The group head must be an Austrian company or a registered branch of EU/EEA corporate entity that holds more than 50% of the capital and voting rights in the Austrian subsidiary company (group member) since the beginning of the subsidiary’s fiscal year. The holding can be either direct or indirect via a partnership or a further group member. If the holding requirement is fulfilled and a request for group taxation was filed with the tax office before the elapse of the calendar year, 100% of the subsidiary’s income (profit or loss) is allocated to the taxable income of the group parent company (group head).
There is no need to transfer the actual profits as a condition for the allocation of profits to the group parent company (group head). The tax advantage for the group member will be charged to its group internally, due to an equalisation agreement to be concluded between the group members, and vice versa in the case of a loss attribution.
The minimum duration of the group taxation regime and of the participation in such a group taxation regime for each group member is three full fiscal years; otherwise, a recapture rule provides for retroactive taxation on a standalone basis.
The group taxation regime is also available for first-tier foreign subsidiaries where an Austrian group member fulfils the holding requirement of more than 50% of capital and voting rights. A foreign group member is only accepted if it is a corporation resident in an EU country or in any other country with which Austria has agreed on a comprehensive mutual information exchange (including, eg, the USA or China). The set-off of the foreign losses from the Austrian tax base is allowed in proportion to the percentage of the share held in the foreign company; it is not required to include foreign profits into Austrian taxation. A recapture rule applies if the losses are later exploited abroad (in order to avoid double dip) and in the case of the exit of the foreign group member from the tax group, as well as in the case of an economic change at the level of the foreign group member (in order to avoid circumvention of the recapture rules).
Capital gains realised by corporations are subject to the ordinary corporate income tax rate of 25%, as being part of the overall profits of the corporation.
This is also applicable for capital gains realised from the sale of shares or a participation in a domestic company that (unlike dividend distributions) is subject to corporate income tax.
Capital losses realised from the sale of participations are deductible; such deduction has to be spread over a period of seven years (ie, only one seventh has to be deducted each year).
Capital gains from the sale of participations in non-Austrian corporations are tax-neutral under the international participation exemption, provided that a participation of at least 10% is held for at least one year in the foreign corporation not mainly generating low-taxed passive income, and that the option for tax effectiveness has not been elected in the tax return for the year of the acquisition of the participation (see 6.7 Taxation on Gain on the Sale of Shares in Non-local Affiliates for more detail on the exemption regarding the sale of foreign participations).
General Austrian taxes in connection with transactions include the Real Estate Transfer Tax (RETT) for the transfer of legal or economic ownership in land or real estate located in Austria. RETT amounts to 3.5% of the sales price or 0.5% of the market value of the Austrian real estate. Also, the transfer of 95% or more of the shares in a partnership or company can trigger RETT for Austrian real estate held by the entity (generally subject to the rate of 0.5%). Another duty of 1.1% is due for the entry of the new owner of the real estate into the Austrian land register.
Stamp duty has to be paid for the conclusion of certain contracts if a written deed is set up for the contract in Austria or abroad and, in the latter case, if certain connections to Austria exist or the document is brought to Austria in the original or as a certified copy. Contracts that are subject to stamp duty include the following:
The scope of stamp duty was enlarged by case law of the Court, according to which an e-mail saved on an Austrian server constitutes a written deed established in Austria, which can trigger stamp duty. Careful stamp duty planning may be advisable, in order to check whether stamp duty can be avoided.
Generally, corporations are subject to VAT if they are regarded as entrepreneurial and carry out transactions that are taxable for VAT purposes in Austria; accordingly, a corporation that is an entrepreneur has the right to deduct input VAT for supplies and services received.
Every business has to deduct payroll taxes (wage withholding tax, social security contributions, ancillary labour costs) if it employs persons. For freelancers, only social security contributions and employer labour costs have to be remitted (ie, no wage withholding tax).
Depending on the business, various other taxes need to be considered, including environmental taxes, various consumption taxes, motor vehicle tax, local taxes, etc.
Insurance tax is owed by insurance takers who are resident in Austria on insurance products (including certain life insurances). The insurer is liable for the insurance tax and has to remit it to the tax office (but can re-charge it to the insurance taker).
Closely held local businesses are mostly structured as limited liability companies (GmbH) or as limited partnerships with a limited company as general partner (GmbH & Co).
The special tax rate on dividends (27.5%) together with the corporate income tax rate of (25%) shall ensure that the use of a company for performing an activity has approximately the same tax impact after dividend distribution to the shareholder, as if the taxpayer had him- or herself earned the income subject to progressive income tax rate (of up to 50%).
If the taxpayer wants to re-invest profits at company level it would be advantageous from the tax perspective to use a company. However, there are rules derived from the Austrian tax system which allow a direct allocation of income generated by a company to its shareholder(s) in case that the company does not have a certain level of organisational structure, which is especially relevant in the case of highly personal services (like consulting, accounting or an architect’s services) rendered by a company on behalf of its shareholder. Therefore, from the tax perspective it only makes sense for individuals to perform business via a company, if they can establish a certain organisational structure at the level of the company (eg, employees).
Apart from the general risk of attribution of income to the shareholders in case of companies without substance described in the last point the definition of an Alternative Investment Fund has to be taken into account, which provides for transparent taxation as an investment fund and involves a certain level of regulation (see 1.2 Transparent Entities, above).
Dividends from closely held Austrian companies (GmbH or AG) are subject to withholding tax of 27.5%, to be withheld by the distributing company. The withholding tax is final, unless the shareholder opts for loss utilisation or the progressive income tax is below 27.5% and he or she opts for progressive income taxation in the annual income tax return. Expenses related to the dividends are not tax-deductible.
Individuals who sell shares held in a closely held company (GmbH or AG) are subject to personal income tax with the capital gain derived from the sale, taxed at the special flat rate provided for investment income (27.5%) under Austrian tax law. The individual has to declare the investment income in his or her annual personal income tax return, if the annual thresholds for non-employment income are exceeded. Expenses related to the capital gains are not tax-deductible.
If shares in a joint stock company (AG) are held by the shareholder with an Austrian securities deposit of a bank, the Austrian bank will deduct dividend withholding tax of 27.5% on the capital gains. This withholding tax has final character, if the shares are not held by the individual as business assets. This means the taxpayer does not need to declare the capital gain from the alienation of the shares in his or her personal annual income tax return, unless voluntarily, if (i) he or she requests loss utilisation, or (ii) his or her personal income tax rate would be below the final flat rate and in this case he or she will opt for progressive income taxation for the capital gain.
The withholding tax on the capital gains does not, however, have final character if the taxpayer holds the shares as a business asset (from commercial or other independent services); this means the taxpayer has to include the capital gain from the alienation of the shares in his or her annual personal income tax return, where the capital gain needs to be adapted according to the book values of the shares. The special income tax rate of 27.5% provided for investment income applies in the tax assessment and the withholding tax is credited to the assessed income tax. Only if the generating of investment income is the focus of the individual’s business activity will the progressive income tax rate apply on the capital gain from the alienation of a share (Sec 27a Par 6 Income Tax Act).
The same rules apply, as in the case of shares in a joint-stock company (AG) held privately (ie, as a not-listed company), including withholding tax on the capital gain to be withheld by the bank, as explained above in 3.4 Sales of Shares in Closely-held Corporation.
Dividend withholding tax amounts to 27.5% (25% if paid to a corporate shareholder), to be withheld by the distributing Austrian company, unless a reduced rate applies under a tax treaty.
Dividends paid to corporations that are resident in other EU Member countries falling under the scope of the EU Parent-Subsidiary Directive (company form listed in the annex 2 of the Directive) are exempt from any withholding tax, if the EU parent company holds at least 10% of the issued share capital of the Austrian company for an uninterrupted period of at least one year, and if it has sufficient substance in terms of office space and personnel, and operative activity in its state of residence. If the conditions for dividend relief at source are not fulfilled (due to missing substance of the EU parent company), the EU parent company can request a refund procedure with the Austrian tax authority, where it can prove that no case of abuse (directive shopping) is given.
Apart from the general relief for EU companies under the EU parent-subsidiary directive, the Austrian corporate income tax law provides – based on the general Fundamental Freedoms of the EU – for a refund of Austrian dividend withholding tax upon the request of all corporations resident in an EU or other EEA country (ie, including corporations resident in Iceland, Norway and Liechtenstein), regardless of the percentage held in the Austrian company and the period of the holding (ie, also for portfolio shares in Austrian companies held by an EU or EEA corporation). The refund is only possible insofar as the Austrian dividend withholding tax is not credited in the other Member country where the parent company is resident (eg, in the case of a tax exemption of the dividends in the residence state).
Interest income paid from Austrian debtors is subject to a withholding of 27.5% (25% for corporations as income recipients) under domestic Austrian tax law. However, interest payments to non-residents that are not received via an Austrian permanent establishment of the non-resident are not subject to tax liability and have to be fully relieved in Austria if the recipient is a non-resident corporation or a non-resident individual resident in a country that is committed to an automatic information exchange with regard to Austria.
Royalties paid to non-resident companies are subject to a withholding tax of 20%, unless a reduced rate applies under a tax treaty or they are exempt from any withholding taxes pursuant to the EU Interest and Royalties Directive.
A special interest rate for non-residents amounting to 20% applies to fees for technical or commercial advisory services, even if the service provider does not have a permanent establishment in Austria through which the services are rendered, unless the rate is reduced or the payments are exempt under an applicable tax treaty.
From 2019, there will be a special withholding tax for the letting of the use of cables (applicable for both residents and non-residents), which will amount to 10% for individuals and 8.25% for corporations (Sec 107 Income Tax Act, Sec 24 Par 7 Corporate Income Tax Act).
Due to favourable taxation measures granted to EU corporations, many foreign investors will invest via EU Member countries. Austria has also advantageous double taxation conventions with non-EU countries providing for a dividend withholding tax of 0% – eg, with the United Arab Emirates or Bahrain.
There is rather strict case law from the Highest Administrative Court in Austria, according to which a structure is regarded as abusive if the use of a foreign company does not have meaningful purposes apart from the channelling of Austrian dividends or other payments through to persons who would otherwise (ie, in the case of their direct receipt) not be entitled to the tax relief for the payments.
Therefore, mere conduit companies are not accepted by the Austrian tax authorities when it comes to granting a refund of dividend withholding tax or withholding tax for other income categories under a double taxation convention. This is especially the case if the actual beneficial owners of the payments are different persons, but even if this cannot be proved (eg, due to retention of the payments by the interim company) there is a risk that the interposition of a company is not accepted from the tax authorities if substantial business reasons and functions of the company cannot be proved. There are various ways to document the economic reasons and functions of a foreign company receiving income from Austria (eg, economic concepts of the group, reinvestment of the income, bundling of participations, or other operative activities of the group in the EU), but in the case of a missing operative character of the non-resident holding company the acceptance will always depend on the overall picture of the facts and circumstances.
All transactions between related parties have to be at arm’s length – ie, concluded under the same conditions as between unrelated parties, as defined in Sec 6 Par 6 Austrian Income Tax Act. The Austrian implementation of the arm’s-length principle corresponds to the arm’s-length principle laid down by the OECD in the Transfer Pricing Guidelines. For all companies (and branches of foreign companies) established in Austria, documentation requirements exist for the taxpayers, in order to prove that the transactions with related parties were at arm’s length. The documentation should demonstrate in a clear manner that the group has complied with the arm’s length principle. It is important to note that, in large transactions, it is recommendable to conduct a transfer pricing study (or benchmark study). Experience with the Austrian tax authorities shows that documentation is of even higher importance whenever a business relation between affiliated companies carries the risk of profit shifting into low or no-tax jurisdictions (be that directly or indirectly by applying stepping-stone strategies via high-tax countries).
Transfer pricing rules are particularly relevant for large service providers rendering services in Austria or trading activities via Austria, as well as for transactions in connection with intellectual property rights. Likewise, in the context of intra-group financing, inbound investors should bear in mind the potential restrictions on interest deduction. There are no statutory thin-cap rules in Austria. Therefore, inbound financings are accepted in principle if the financing is at arm’s length (ie, the Austrian company is not effectively in default or extremely under-capitalised). On the other hand, as regards the interest rate, the Austrian tax authorities do not accept interest rates higher than the EURIBOR (plus a mark-up) for typical intra-group financings. Higher interest rates may be argued – eg, if the foreign financing company has to refinance itself or due to the documented rating of the Austrian company (eg, with documented loans offered by third-party banks).
Austrian group companies with an annual turnover of more than EUR50 million in two consecutive years (or EUR5 million in commission fees from the principal) have to prepare a master file and/or local file. The content of the master file corresponds to the description contained in Annex I to Chapter V of the OECD Transfer Pricing Guidelines. The core information that should be found in the local file is described in Annex II to Chapter V of the OECD Transfer Pricing Guidelines.
Large multi-national enterprises with consolidated group revenue of at least EUR750 million must additionally take part in the country-by-country reporting for accounting periods beginning on or after January 1 2016. In general, the ultimate parent company of the multinational must file, on an annual basis, the country-by-country report with its tax administration, which then distributes it to all participating jurisdictions where entities of the multinational have been set up.
First of all, in the case of an Austrian distribution company, high importance has to be devoted to an arm’s-length remuneration to be paid by the foreign principal to the Austrian distributing company, which has to correspond to the risks, the functions borne by the distribution company and the assets employed by the distribution company. Further, it has to be noted that Austria follows the two-taxpayers approach in the case of limited risk distributors, as it is advocated in the OECD Model Tax Commentary on Art 7 OECD Model Tax Convention and suggested in BEPS Action 7. Accordingly, an agent acting for the foreign principal constitutes a permanent establishment as a dependent agent in Austria. Therefore, if a foreign company sells goods via subsidiaries or other affiliates in Austria that do not assume the responsibility of a fully fledged distributor, close attention needs to be devoted to the arm’s-length principle. Clearly, in practice, in tax audits the Austrian tax authorities investigate whether conversions have taken place from an Austrian fully fledged distributor to a limited risk distributor and apply the two-taxpayers approach, especially in such cases of reduction of the Austrian tax revenue. Whether this is in conformity with the existing legal provisions remains to be decided by the Courts.
The Double Taxation Convention between Austria and Germany provides a special rule, according to which the creation of a permanent establishment of the principal (via an Austrian distribution entity as its dependent agent) is generally avoided by the payment of an adequate remuneration to the Austrian distribution entity for its distribution services. However, it is unclear whether this could avoid the existence of a permanent establishment of the principal in Austria in all cases of limited risk distributors.
Whereas the French Supreme Court has rejected the existence of a permanent establishment in France in the case of commissionaire arrangements with a foreign principal (Zimmer case, 2010), unless it is entitled to bind, by its actions, the foreign principal with its final customers, Austria basically assumes the creation of a dependent agency permanent establishment of the principal in cases of commissionaire structures.
It has to be noted that commissionaire arrangements are also affected because they are targeted by the BEPS recommendations. It is advisable to check in the multilateral instrument for the adaption of double taxation conventions (MLI), which entered into force in Austria in July 2018, whether a revised definition of permanent establishment is provided with the particular country in that regard. This is not the case with Austria, because the Austrian Ministry is of the opinion that this interpretation was already possible based on the original wording of the OECD Commentary.
As far as is currently known, there are no significant deviations from the OECD standards in the Austrian Ministry’s interpretation of the transfer pricing rules. In particular, the Austrian Ministry of Finance follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Additionally, several decrees and the Austrian Transfer Pricing Guidelines 2010 have been issued by the Austrian Ministry of Finance in accordance with and with explicit reference to the OECD Transfer Pricing Guidelines.
In the case of primary adjustments operated to a related party by the tax authorities of another contracting state, the Austrian tax authority in charge is, in principle, obliged to re-open the Austrian tax of the Austrian related party, in order to make a corresponding (compensating) adjustment. This can be done in both cases (ie, corresponding increase of Austrian taxes after a reduction in the other contracting state or compensating reduction of Austrian taxes in the case of a transfer pricing mark-up in the other contracting state). A compensating adjustment (reduction of Austrian taxes after mark-up in the other state) can be made either upon the request of the Austrian related party or ex officio – in the first case, subject to the condition that the Austrian related party can prove the correctness of a transfer pricing correction made in the other contracting state.
If double taxation remains due to diverging interpretations of the double taxation convention by the contracting states, a mutual agreement procedure between Austria and the other contracting state can be initiated. Basically, the request for such a mutual agreement procedure has to be made by the parent company in its residence state or, in the case of transactions between sister companies, in either of the residence states of the sister companies (Austrian Transfer Pricing Guidelines 2010 para 352). Based on the EU arbitration convention, the arbitration procedure should be able to be initiated in either of the Member States (Austrian Transfer Pricing Guidelines 2010 para 36).
Generally, there are no differences between the taxation of corporations that are resident in Austria and Austrian branches of non-resident corporations based outside of Austria. It needs to be determined whether the branch qualifies as a permanent establishment under the double taxation convention that applies to the residence state of the company, and which income needs to be allocated to the permanent establishment in relation to the head office of the company located in the residence state.
The “separate entity rule”, which requires similar treatment of branches and resident companies in all respects, as advocated by the Authorised OECD Approach of the year 2010 (Report on the Attribution of Profits to Permanent Establishments) has not been implemented in any of the Austrian bilateral tax conventions so far, which leads to differences compared to subsidiaries (regarding financing or the letting of intangibles between the head office and the branch).
As this separate entity approach has not yet been implemented in any of the Austrian bilateral tax conventions, interest expenses for debt granted by the foreign head office of the company to its Austrian branch will not be fully deductible at the level of the Austrian branch. Conversely, no (fictitious) interest income will be taxed by the Austrian branch for financial means granted by the Austrian branch to its foreign head office (in contrast to what the French Supreme Court ruled for the French tax law). Accordingly, the usual methods for the allocation of interest expenses to the Austrian branch can be used (AOA I/141 et seq) – eg, the capital allocation method, the thin-capitalisation approach or the regulatory minimum capital approach.
Capital gains realised by a non-resident on the sale of shares in an Austrian company are subject to income tax according to domestic Austrian income tax law, if the shareholding amounts to at least 1% (or amounted to at least 1% within the last five years). Basically, the sale of a company at an upper-tier level (unlike in the case of a partnership structure) does not trigger Austrian taxation as long as the direct shares in the Austrian company are not sold.
If a double taxation convention applies between the country of the alienating shareholder and Austria, Austria does not have a taxing right for the alienation gain derived by the non-resident from the sale of the shares in the Austrian company if the double taxation convention follows the OECD Model Tax Convention (Art 13 Par 5 OECD Model Tax Convention).
However, an Austrian-source taxing right for the alienation gain derived by the non-resident can be given if the convention deviates from the OECD Model Tax Convention (eg, DTT Austria-France for participations of more 25% or more) or if the sold company primarily holds Austrian real estate and the double taxation convention contains a real estate clause (along the lines of Article 13 Par 4 OECD Model Tax Convention).
Change of ownership rules apply in the case of an alienation of a participation in an Austrian company, due to which tax loss carry-forwards available at the level of the Austrian company are forfeited if a substantial shareholder change occurs in connection with a substantial change in the economic and the management structure of the company. The aim of the provision is to avoid loss trafficking, on the basis of which the tax loss carry-orwards of a company are sold together with its mere shell. A substantial shareholder change takes place if 75% or more of the shareholders change. A substantial change in the economic structure takes place if the company’s activity significantly decreases in terms of assets, income or other economic operators. A substantial change in the management structure takes place if more than the half of the company’s managers are replaced. Special rules apply in corporate reorganisations, where the situation of all merged companies needs to be taken into account. An exception applies if the sale serves the restoration of a company or in the case or reorganisations if certain synergy effects can be documented.
The application of the change of ownership rule does not trigger immediate taxation, but prevents the ongoing use of tax loss carry forwards. The change of ownership rules basically only apply in the case of a direct sale of the Austrian participation, and not if an upper-tier company in the chain above the Austrian company is sold. However, according to the recent case law of an Austrian Federal Tax Court, it is unclear whether the sale of a holding company directly holding all the shares in the Austrian company could eventually also be sufficient to trigger the forfeiture of tax loss carry-forwards at the level of the Austrian company.
In a sale of 95% or more of the shares in an Austrian company or partnership holding Austrian real estate, Austrian real estate transfer tax (RETT) is triggered, which should amount to 0.5% of the market value of the Austrian real estate. According to the general opinion, the sale of shares in the parent company of the Austrian entity holding the real estate is not sufficient to trigger RETT, which is only triggered in a direct sale of the participation in the Austrian company, if no case of abusive circumvention is given (see 7.1 Overarching Anti-Avoidance Provisions).
Formula apportionment is not accepted as a method to determine the profits of an Austrian affiliated enterprise. Indirect forms of profit allocation (using economic operators to allocate profits) are generally rejected by the Austrian tax authorities, for branches of foreign entities and for affiliated corporations. However, the transfer pricing methods accepted by the OECD Transfer Pricing Guidelines can be used to allocate income to Austrian affiliated enterprises. Apart from the comparable controlled price method, this refers especially to the other standard methods like the cost-plus or the resale minus method, as well as the transactional net margin method.
There are no specific rules regarding the deduction of payments made by an Austrian (resident) affiliate to a non-Austrian (ie, non-resident) affiliate for the management of the Austrian (resident) affiliate.
When determining the remuneration that can be deducted at the level of the Austrian affiliate for the services rendered to it by a foreign affiliate, the arm’s-length principle must be considered, taking into account the functions and risks borne by the foreign affiliate.
Usually the cost-plus method is accepted for routine services – ie, the costs of the services plus a certain mark-up to be charged to the Austrian affiliate. A mark-up of more than 5% can be applied only for high-quality services. A cost allocation without a profit margin is possible and even required for ancillary services – ie, those that do not belong to the business focus of the affiliate rendering the services (Austrian Transfer Pricing Guidelines 2010 para 77).
Lending by an Austrian subsidiary to a non-Austrian parent company or other affiliated company abroad is subject to the arm’s-length principle – ie, an arm’s-length interest income will need to be allocated and subject to corporate income tax at the level of the Austrian subsidiary. To determine the interest rate, a comparison with third-party banks is possible. The Austrian Ministry of Finance holds that a direct comparison of the lender with an Austrian bank is not always adequate, as the aims of banks and intra-group financings are different. Whereas the banking business seeks to achieve profits from the extending of loans to the market, the aim of intra-group financings is to safeguard liquidity and optimise the group internal financing structure. As a consequence, the Austrian Ministry of Finance does not principally accept that a borrowing group entity charges a rate that is as high as a bank would have charged to its customers (Austrian Transfer Pricing Guidelines 2010 para 89). The effective interest rate applied for the group-internal financing depends on various circumstances, such as the liquidity of the Austrian company (the higher the liquidity the lower the interest rate), whether the Austrian company had to refinance the loan, and the interest rates that would be offered to the foreign affiliate from Austrian and/or foreign banks.
Austrian corporations (ie, corporations that are resident in Austria) are subject to corporate income tax in Austria on their worldwide income. The part of the income of the Austrian corporation that originates from foreign sources may be relieved under a decree of the Ministry of Finance for the unilateral avoidance of international double taxation. The relief takes the form of either a credit of foreign taxes or an exemption in case of certain active income (eg, derived from a permanent establishment abroad or income from foreign real estate), which is effectively subject to certain taxation (ie, > 15%) abroad. If a double taxation convention applies, the rules of that convention take precedence over the unilateral relief measures. However, due to the introduction of CFC rules, which will enter into force on 1 January 2019, the exemption of foreign permanent establishments’ profits will not be applicable anymore in the case of double taxation conventions regarding low-taxed foreign permanent establishments (< 12.5%); for a description of CFC legislation, see 6.4 Use of Intangibles.
Basically, expenses incurred for business purposes are deductible at the level of the Austrian corporation, unless they are immediately economically related to tax-exempt income. When an Austrian corporation is regarded as having a permanent establishment outside Austria that is exempt either under the unilateral relief provision (foreign taxation above 15%) or under a double taxation convention (foreign taxation above 12.5% as of 2019), the expenses and losses attributable to the foreign permanent establishment are not deductible for the purpose of Austrian CIT and need to be added back to the CIT base.
Dividend income from foreign corporations is exempt from corporate income tax under the international participation exemption in the following circumstances:
The international participation exemption is denied for the reason of assumed abuse if the foreign company is taxed at a low rate abroad and has a passive business focus (ie, mainly derives low-taxed passive income). In this case, the exemption of the dividend is replaced by a credit of the underlying foreign corporate taxes on the Austrian corporate income tax levied on the dividend (switch-over). Due to the introduction of general CFC rules for foreign subsidiaries as of 1 January 2019 (see 6.5 Taxation of Income of Non-Local Subsidiaries Under CFC-Type Rules), the switch-over provision should no longer be relevant for participations of 50% or more, as the scope of CFC legislation should apply, so that subsequent distributions shall be tax-exempt under the general conditions of the international participation exemption, as described above.
Dividend income from portfolio participations (participation below 10%) in foreign companies is exempt from corporate income tax as well if the foreign company is comparable to an Austrian company and is resident in a country with which Austria has agreed on a comprehensive exchange of information or is an EU company listed in the EU Parent-Subsidiary Directive, and if it does not fall under the scope of the international participation privilege. The dividend exemption for portfolio participations does not apply if the foreign company is subject to taxation of less than 15% abroad (anti-abuse provision), which shall be restricted to portfolio participations that amount to 5% or more in a company’s share capital as of 1 January 2019.
The exemption of foreign dividends does not apply in a hybrid situation – ie, if the dividend payments are deductible from the corporate income tax base abroad.
Intangibles developed by an Austrian corporation may be transferred or let to a non-Austrian subsidiary at arm’s-length conditions, resulting in taxable income (transfer price or royalty) at regular rates, subject to corporate income tax at the level of the Austrian corporation.
Tax losses incurred for the development of the intangibles by the Austrian corporation can be utilised (without time-limits) for set-off from its corporate income tax of 25%. Each year there is a minimum taxation of 25% of annual income, but the remaining tax-loss carry-forwards can be set off in later periods, subject to the same annual minimum taxation (see 2.4 Basic Rules on Loss Relief regarding tax-loss carry-forwards).
Austria has implemented CFC rules based on the EU Anti-BEPS Directive, which will enter into force on 1 January 2019 and provide for an allocation of non-distributed low-taxed passive income of foreign subsidiaries to the Austrian parent company corresponding to the percentage of the shares or voting rights held in the foreign subsidiary.
The CFC rules will apply if the Austrian parent company holds directly or indirectly – alone or together with associated enterprises – more than 50% of the voting rights or profit participating rights of the foreign subsidiary, and if the foreign subsidiary is low-taxed and earns passive income.
Austria has made use of the option of the EU Anti-BEPS Directive, according to which CFC legislation shall only apply if the foreign subsidiary’s passive income accounts for more than one third of its total income. Therefore, CFC legislation is avoided for a subsidiary if at least two thirds of the subsidiary’s income is active.
Low taxation is given in the case of an effective tax rate abroad of 12.5% or below. Passive income is defined according to the catalogue of Article 7 (2) (a) of the EU Anti-BEPS Directive (ie, interest income, royalties, dividends or income from the disposal of shares, income from financial leasing, insurance, banking and other financial activities as well as invoicing companies). There is an exception for foreign subsidiaries with substantive economic activity in terms of personnel, equipment, assets and premises, as evidenced by the relevant facts and circumstances.
First of all, there are strict rules regarding the substance of a foreign company for the relief of dividend payments received from Austrian companies under the EU parent-subsidiary directive (Sec 94 (2) Income Tax Act). Accordingly, the EU parent company must have office space, own staff and be operationally active. Otherwise, dividend withholding tax has to be withheld on the dividends (see also 4.1 Withholding Taxes). The same principle applies in substance for the eligibility of non-resident corporations for relief under double taxation conventions.
Generally, even before the introduction of formal CFC rules, general anti-abuse provisions and the substance over form approach were applied by the Austrian tax authorities to foreign subsidiaries of Austrian companies (and are still applicable next to the application of CFC rules). Accordingly, a look-through approach could be applied and the foreign subsidiary’s income directly allocated to the Austrian shareholder in the case of wholly artificial arrangements or if the management was completely controlled by the Austrian shareholder. Different tests will need to be applied due to the introduction of CFC rules, and the direct allocation of the foreign subsidiary’s income to the Austrian parent company will be possible in all cases where the foreign subsidiary does not have “significant economic activity”, which will simplify the allocation of the foreign subsidiary’s income to the Austrian parent company. However, the general abuse rules will remain of importance after 1 January 2019 in cases where the CFC rules do not apply – eg, for individuals as shareholders of foreign companies.
Capital gains from the sale or other disposition of a foreign participation are exempt from corporate income tax if the participation fulfils the criteria of the international participation exemption. The international participation exemption is applicable on a participation in a foreign entity (which is either comparable to an Austrian company or a legal form enumerated in the annex 2 of the EU parent-subsidiary directive), if the Austrian corporation holds at least 10% of the issued share capital of the foreign corporation for an uninterrupted period of at least one year and the income is not mainly passive low-taxed income. The international participation exemption provides for the neutrality of the participation, which means that, on the other hand, capital losses and impairments of the participation also have to be treated as neutral for corporate income tax purposes.
There is an option to exercise an (irrevocable) option for the tax effectiveness of the participation in the CIT return of the year of the acquisition of the participation, in which case the exemption of capital gains does not apply, but impairments or capital losses from the sale of the participation can be exploited with the general limitations provided for in Austrian corporate tax law (deduction spread of over seven years); see 2.1 Calculation for Taxable Profits.
The exemption does not apply and is replaced by an indirect credit of the underlying foreign corporate taxes in cases of presumed abuse, defined as a passive business focus of the foreign corporate entity subject to low taxation abroad (switch-over). After the entering into force of general CFC rules on 1 January 2019 (see6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules), the switch-over provision will only be relevant for participations of less than 50% not covered by the general CFC legislation, whereas in the application of the CFC legislation later disposals of the shares should be tax-exempt under the general conditions of the international participation exemption described above.
Transactions are deemed to be abusive and are therefore disregarded if they consist of a chain of legal transactions that has an unusual and inappropriate character and can only be explained due to tax reasons. In addition, the Austrian law follows the substance over form approach. These two GAAR rules are often used by the authorities to challenge tax structures, intragroup transactions and reorganisations. The principal purpose test (PPT), as stipulated in Article 6 of the EU Anti-BEPS Directive, will be implemented in Austria as of 2019. Accordingly, a transaction is regarded as abusive if one of its principal purposes (no longer the only purpose, as was previously the case) is the saving of taxes.
Apart from looking through foreign-based companies, this also enables the non-acceptance of income attribution to companies that do not have any business purpose and are only used for the circumvention of Austrian tax rules. This mainly concerns merely artificial structures for which no reasonable explanation can be given, except for the Austrian tax savings (eg, time-near interposition of an empty foreign company between an Austrian company and its foreign shareholder, which is then sold, with the mere aim of avoiding Austrian capital gains taxation that would otherwise be due in the case of a direct sale of the Austrian participation by the foreign shareholder).
After a tax decree has become final and binding from the side of the Austrian tax office, tax audits can be performed by the tax authorities until the statute of limitation has been reached (which is five years plus one, with a maximum of ten years). There is no audit cycle prescribed by the law, but audits used to take place every three to five years. The frequency of tax audits depends on the business size, with large businesses being audited on a permanent basis.
As of 2019, large Austrian businesses (ie, those with an annual turnover of more than EUR40 million) with a high degree of compliance in the past and also an appropriate internal control system will have the possibility to opt for horizontal monitoring, according to which constant control by the tax office will replace the traditional system of tax audits (upon election only). This system has been tested in a trial phase.
As suggested by BEPS Action 3, Austria has implemented CFC legislation, which entered into force in Austria on 1 January 2019 in line with the Anti-BEPS Directive (EU 2016/1164).
Austria has introduced the principal purpose test into its domestic tax law, entering into force on the same date, which will adapt the already existing general anti-abuse provision. Both measures were also laid down in the EU directive on the rules against tax-avoidance practices that directly affect the functioning of the internal market (Anti-BEPS Directive (EU 2016/1164)).
As recommended by BEPS Action 15, Austria signed the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI) on 7 June 2017. The MLI entered into force in Austria after its ratification by five states on 1 July 2018, and is currently applicable in Austria with regard to Poland and Sweden. Austria intends therein to amend around 40 of its total 90 double taxation conventions, if the other countries agree. Apart from fulfilling the minimum standard, Austria has opted for the arbitration provisions. BEPS Action 13 calling for the Master File and Local File as well as Country-by-Country Reporting for large affiliated enterprises has been implemented, applicable for accounting years starting on or after 1 January 2016.
Austria intends to implement the EU directives enacting the BEPS recommendations to the fullest extent. This is the case for the four amendments of the EU Directive 2011/16 on Mutual Cooperation in the field of taxation as regards mandatory information exchange, so the mandatory information exchange regarding advance pricing agreements, money- laundering provisions and the country-by-country reporting in transfer pricing matters were implemented in Austria. Also, the EU Anti-BEPS Directive (EU 2016/1164) was already implemented in Austria (except for the interest limitation rule of Art 4), as explained above.
The Austrian government is seeking to achieve a uniform approach, best implementing the OECD recommendations in the BEPS Action Plan, while at the same time avoiding double efforts that might arise from different approaches at an EU level. Therefore, regarding some of the remaining BEPS Action points to be implemented (the question of digital taxation in Action 1, the mandatory disclosure rules of Action 12), it must be expected that the Austrian measures will conform with the progress at an EU level.
International tax law is of importance for the business location in Austria, as many multinationals and international groups of enterprises use Austria as a centre for their activities. As a consequence, the Austrian Ministry of Finance is aiming to establish good relations with other counties and to negotiate and extend further the Austrian double tax treaty network. This has led, for instance, to a quick adaption of the MLI as provided in BEPS Action 15 and the adoption of the arbitration rules as provided for in BEPS Action 14.
Austria has good connections to the OECD and has itself fostered several initiatives at OECD level, so it can be expected that BEPS initiatives will be implemented quickly by Austria. This is also shown by the fact that Austria was, eg, the first country to submit the ratification instrument of the MLI to the depositary (the OECD Secretary General). However, it may well be possible that some of the BEPS Actions are considered already sufficiently implemented, in which case Austria would not see any immediate necessity to change the law (eg, regarding BEPS Actions 2 or 8-10).
In Austria, a rather high corporate income tax rate of 25% is combined with a rather modest corporate income tax base, accompanied by modern tax features such as a swift group taxation regime, the possibilities of interest deduction and incentives for R&D. However, these are not preferential tax regimes, and are not vulnerable to the BEPS approach. As regards rulings, Austria has committed itself to the automatic information exchange, as provided in the 4th directive amending the EU Mutual Co-operation in administrative tax matters.
Austria is of the opinion that the recommendations for the avoidance of hybrid mismatches are largely fulfilled in the Austrian tax system. The exemption of foreign dividends is denied at the company level if the dividends are tax-deductible in the state of the paying entity (Section 10 Par 7 CITA). On the other hand, the deduction of interest and royalties as a business expense is denied in Austria for payments to affiliated parties that are subject to low taxation of below 10% abroad (Section 12 Par 1 Sub-par 10 CITA).
Austria has a tax regime providing for the worldwide taxation of residents. However, due to the double tax treaty network, residents' income that is generated in foreign establishments may be exempt from tax – which will be adapted by CFC rules in the case of passive low-taxed income of not more than 12.5%.
It is not yet possible to evaluate how far the interest limitation rule, as set out by the Anti-BEPS directive (ie, along the lines of the German thin-capitalisation rules already in force), will influence debt investments by non-resident corporations in Austria. Austria already has a restriction on interest expenses paid by Austrian companies to low-taxed affiliates (see 9.6 Proposals for Dealing with Hybrid Instruments). The Austrian Ministry of Finance assumes that this provision denying deductibility of interest in the case of payments to low-tax regimes is equally effective to the interest-limitation rule set out in Article 4 of the EU Anti BEPS Directive. If so, Austria has to transpose the interest limitation rule by 1 January 2024 at the latest.
The inclusion of foreign permanent establishments located in other states is certainly a treaty override if an applicable double taxation convention provides for the exemption of the foreign permanent establishment in Austria. Still, it is not assumed that this argument will prevent the application of the CFC rules on foreign permanent establishments in Austria. Changing the CFC rules at the EU level by restricting them to a blacklist of countries may be an alternative, but this was not provided in the EU Anti-BEPS directive. From the possibilities of the EU Anti-BEPS directive, Austria chose the catalogue with passive income (Article 7 (2) a) and not the option of inadequate arrangements (Article 7 (2) b).
Austria did not implement the LOB rules as provided in Action 6 of the BEPS initiative.
Austria implemented the PPT rule with effect from 1 January 2019. According to the explanatory notes of the tax bill introducing the PPT rule, the PPT rule is intended to be interpreted along the lines of the ECJ case-law on the abuse of tax law, which the Austrian Supreme Administrative Court used to do with the old GAAR, which might indicate that the impact of the PPT rule is not expected to be high.
The transfer pricing changes proposed by BEPS Actions 8-10 largely correspond to the Austrian view of the OECD Transfer Pricing Guidelines, so no need for adaption is provided. As regards the identification of intangibles, including intellectual property, Austria follows the interpretation of the OECD fully, as it is also laid down in chapter VI of the Transfer Pricing Guidelines 2017.
Austria has implemented the special rules for the automatic information exchange on the country-by-country reports for large multinationals with a consolidated group revenue of at least EUR750 million for accounting periods beginning on or after 1 January 2016, as provided for in Action 13 of BEPS. Due to the required size of the multinational enterprises, the Ministry of Finance expects that this obligation will only concern some 90 business entities in Austria.
The directives for the automatic exchange of information on tax rulings and money laundering have been implemented in Austria. The EU-wide mandatory disclosure directive of 25 May 2018 (2018/822), according to which taxpayers and their intermediaries will have to report cross-border tax transactions (defined along the lines of the directive), will have to be implemented in Austria by the end of 2019, but will cover transactions carried out already, from 25 June 2018.
In March 2018, the EU commission published two drafts for directives regarding the enactment of a digital service tax (as a short-term solution) and digital PEs (as a long-term solution). No further specification has yet been made in Austria.