Contributed By bpv Huegel
Corporate businesses generally adopt the form of a company. There are two forms of companies: the limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) and the joint stock company (Aktiengesellschaft – AG). Further corporate forms include the co-operative (Genossenschaft – Gen) and the Societas Europaea (SE). The corporate entities are taxed as legal entities, and are subject to corporate income tax.
Whereas the GmbH is a private limited company with a typically low number of shareholders, the AG is generally a public limited company, the shares of which can be held on 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.
Further key differences are as follows:
Partnerships (OG, KG) are legal entities, but are treated as transparent for income and corporate income tax purposes. Apart from that, there is also a general partnership under civil law, which is not a legal entity. VAT treatment of partnerships depends on whether or not they engage as entrepreneurs in the public.
The OG is a general partnership (with unlimited liability of the partners), whereas the 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).
For example, 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 (AIFMG), 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, among others, of industrial holding companies and single family offices.
In Austria, AIFM 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 accumulation of proceeds is not possible at fund level. Upon distribution to investors (or as deemed distributions at year end in the 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 AIFM are obliged to have a fiscal representative, which has the obligation 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, unless the income of the fund can be proved otherwise by the investor(s).
A corporation is treated as being 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 face 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 being resident in the contracting state where its effective place of management is located. In this regard, Austria has not followed Art 4 of the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI) with its new rules for dual-resident companies.
If a company has its seat or place of management in Austria, it has to pay corporate income tax on all its profits from Austria and abroad. If a company is not so based in Austria but has an office or branch there, it only pays company tax on 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, which hold the interest either directly or indirectly via other transparent entities.
Corporate income tax amounts to 25% in Austria. There is an annual minimum corporate income tax of EUR1,750 for a limited liability company (with privileged minimum taxes for newly formed companies within their first ten years of existence) and EUR3,500 for a joint stock company.
The individual’s income tax rate is progressive, starting with 0% (EUR0-11,000) and rising 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). For annual income exceeding EUR1 million, a tax rate of 55% applies until 2020.
Corporate income tax is paid by corporations, and individuals' income tax is paid by individuals operating a business as sole proprietors. Corporate income tax and individual’s income tax is also paid by companies and individuals respectively, holding 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 their 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. Major mandatory deviations provided for by tax law for the determination of profits by corporations are that losses from the sale or depreciation of participations in other companies have to be spread over seven years, that dividend income is largely exempt from corporate income tax (see, for example, 6.3 Taxation on Dividends from Foreign Subsidiaries), and that remunerations paid to supervisory board members are only deductible at 50%. Apart from these, further special deviations may occur (eg, regarding the acceptance of accruals, car depreciation or the non-deductibility of representational expenses).
Individuals have to determine their profits based on statutory accounts (in the aforementioned way) only 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 its profits based on a receipts basis (ie, 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 perform an active business 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 by Austrian permanent establishments of foreign corporations, amounting to 14% according to Sec 108c of the Austrian Income Tax Act, which is unrestricted for in-house-research but restricted to expenses of EUR1 million for contracted research.
Regarding transactions involving an Austrian company acquiring another Austrian company, it is generally possible to deduct interest expenses incurred for the acquisition of the Austrian target company from the Austrian corporate income tax base of the acquiring Austrian company (for exceptions to that general rule, however, see 2.5 Imposed Limits on Deduction of Interest). By electing to form a (consolidated) tax group between the acquiring company and the target company in Austria, the 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.
In general, business corporations – ie, companies (AG, GmbH) – can set-off losses without limitation (although this is not the case for corporations that are not operating as a business or individuals).
Tax loss carry-forward is possible, with no time limit, but no carry-back option of tax losses is available. In case of non-business income, neither a carry-forward nor a carry-back of losses is admitted.
For a corporation, the deduction of the loss carry-forward is limited to 75% of its annual taxable income; the leftover losses remain deductible in later periods, subject to the same 75% limitation.
As the tax loss is carried forward 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 shareholder changes, unless the so-called “change-of-ownership rules” apply, according to which 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 (although special rules apply for the forfeiture of tax losses in the case of corporate reorganisations).
There are no general interest barrier regulations in Austria yet. However, the financing structure of an Austrian company must be at arm’s length, otherwise a re-qualification of debt into equity or an adjustment of the concrete interest rate might take place. Interest expenses are especially not deductible if they relate directly to tax-exempt income.
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.
However, the EU Anti-Tax Avoidance Directive (ATAD) stipulates a general interest barrier regulation, stating that interest expenses are fully tax-deductible only up to the amount of the interest income and, what is more, only up to 30% of the EBITDA. The Austrian Ministry of Finance took the position that the existing regime restricting interest and royalty deduction is as effective as the rules stipulated in the ATAD. In July 2019, however, the EU Commission denied equivalence to said regulation and opened formal infringement proceedings against Austria. The reaction of the Austrian legislator concerning that matter remains to be seen (see also 9.7 Territorial Tax Regime).
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 an EU/EEA corporate entity that has held 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 minimum duration of the group taxation regime and of the participation in such group taxation regime of each group member is three entire 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 in relation to which 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 (eg, the USA or China). The set-off of the foreign losses from the Austrian tax base is allowed proportionally to the percentage of the share held in the foreign company; it is not required to include foreign profits into Austrian taxation. Certain recapture rules may apply though (eg, in case the losses are later exploited abroad).
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.
The sale of participations in non-Austrian corporations is generally tax neutral under the conditions of the international participation exemption (ie, a participation of at least 10% held for at least one year), unless the option for tax effectiveness has been elected in the tax return for the year of the acquisition of the participation (see also 6.7 Taxation on Gain on the Sale of Shares in Non-local Affiliates).
General Austrian taxes in connection with transactions include 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, in certain cases, 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%). A further 1.1% is due for the entry of the new owner of the real estate into the Austrian land register.
In addition, stamp duty has to be paid for the setting up of written deeds for certain contracts. This applies if the written deed for the contract is either set up in Austria or it set up abroad and there are certain connections to Austria. Contracts subject to stamp duty are – for instance but not exclusively – business rental agreements (stamp duty of 1% of the annual rent multiplied by the years of duration or of the three-fold annual rent in case of unlimited duration) and assignments of rights (stamp duty of 0.8% of the consideration).
Generally, corporations are subject to VAT if they are regarded as entrepreneur and carry out transactions that are taxable for VAT purposes in Austria. According to that, 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 people. 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, insurance tax, local taxes, etc.
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 KG).
The special tax rate on dividends (27.5%) together with the corporate income tax rate (25%) shall ensure that the use of a company for conducting business activities approximately amounts to the same tax burden after dividend distribution as if the taxpayer himself had earned the income at the progressive income tax rate (which amounts to 50%, or 55% respectively).
Apart from the general risk of the attribution of income to shareholders in the case of companies without substance, in certain cases the definition of an Alternative Investment Fund has to be taken into account. This leads to transparent taxation and involves a certain level of regulation.
Dividends from closely held Austrian companies (GmbH or AG) are subject to withholding tax of 27.5%, to be withheld by the distributing company upon the distribution. The withholding tax is final, unless the shareholder opts for loss utilisation or the progressive income tax is below 27.5% and he/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 on the capital gain derived from the sale, taxed at the special flat rate provided for investment income (27.5%). The individual has to declare the investment income in his or her annual personal income tax return. Expenses related to the capital gains are not tax deductible.
If shares in a joint stock company (AG) are held by the shareholder within an Austrian bank securities account, the Austrian bank will deduct dividend withholding tax in the amount 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 gains from the alienation of the shares in his/her personal annual income tax return, unless certain voluntary conditions apply.
However, the withholding tax on capital gains does not have final character if the taxpayer holds the shares as business assets (from commercial or other independent services). Then the tax payer has to include the capital gains 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. If the generation of investment income is the main focus of the individual’s business activity, then exclusively the progressive income tax rate applies 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 privately held shares in a joint stock company (AG), including tax on the capital gain to be withheld by the bank, as explained in 3.4 Sales of Shares by Individuals in Closely Held Corporations.
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 resident in other EU Member States 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 conducts 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 or missing certificate of residence), 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 holding (ie, also for portfolio shares in Austrian companies held by the EU or EEA corporation). The refund is only possible insofar as the Austrian dividend withholding tax is not credited in the other Member State where the parent company is resident.
Interest income paid from Austrian debtors is subject to a withholding tax of 27.5% (25% in case of 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 either a non-resident corporation or a non-resident individual resident in a country that is committed to an automatic information exchange with Austria, and if a certificate of residence is provided by the recipient.
Royalties paid to non-resident companies are subject to a withholding tax of 20%, unless a reduced rate applies under a tax treaty or said royalties 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.
Due to favourable taxation measures granted to EU corporations, many foreign investors are going to invest via EU Member States. Austria also has 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 of 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 a meaningful purpose apart from the channelling of the Austrian dividends or other payments through to persons who would otherwise (ie, in case of their direct receipt) not be entitled to the tax relief regarding said 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 is not the case, there is still a risk that the interposition of a company is not accepted by the tax authorities if the 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) but in 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 the case of large transactions, it is recommendable to conduct a transfer pricing study (or benchmark study).
Transfer pricing rules are particularly relevant for large service providers rendering services in Austria or trading activities via Austria, and 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 to interest deduction. Currently, there are no statutory thin-cap rules in Austria, so 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 and the financing would have been concluded under the same conditions with an unrelated third party).
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 which is expected to be found in the local file is described in Annex II to Chapter V of the OECD Transfer Pricing Guidelines.
Large multinational enterprises with consolidated group revenue of at least EUR750 million must additionally take part in country-by-country reporting. 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.
In the case of an Austrian distribution company, first of all 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 and functions borne and the assets employed by the distribution company. Furthermore, it has to be noted that Austria follows the two-taxpayers approach in cases of limited risk distributors, as 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.
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. It is unclear, however, whether this could avoid the existence of a permanent establishment (PE) of the principal in Austria in all cases of limited risk distributors.
Austria also assumes the creation of a principal’s dependent agency PE in cases of commissionaire structures, which are also 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 for 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 currently known, there are no significant deviations of the Austrian Ministry’s interpretation of the transfer pricing rules from the OECD standards. In particular, the Austrian Ministry of Finance follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. In addition, 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. 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 mutual agreement procedure has to be made by the parent company in its residence state or, in transactions between sister companies, in either of the residence states of the sister companies. Based on the EU arbitration convention, the arbitration procedure should be able to be initiated in either of the Member States.
Generally, there are no differences between the taxation of corporations resident in Austria and Austrian branches of non-resident corporations. It needs to be determined whether the branch qualifies as a permanent establishment under the applicable double taxation convention with 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 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 the 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 have to be taxed by the Austrian branch for financial means granted by the Austrian branch to its foreign head office (unlike how the French Supreme Court has 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).
Capital gains realised by a non-resident on a 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 is applicable between the country of the alienating shareholder and Austria, which follows the OECD Model Tax Convention, Austria does not have a taxing right on the capital gain derived by the non-resident from the sale of the shares in the Austrian company.
However, capital gains will be subject to taxation in Austria either if the convention deviates from the OECD Model Tax Convention (eg, DTT Austria-France for participations of more 25% or more) or if the company mainly owns domestic real estate and the double taxation convention contains a real estate clause along the lines of Art 13 Par 4 OECD Model Tax Convention.
In the case of a substantial change in the direct shareholder structure against consideration together with substantial changes in the economic and management structure, tax loss carry-forwards are no longer available at the level of the Austrian company. A substantial change in the shareholder structure is deemed to have occurred if 75% or more of the shareholders change. A substantial change in the economic structure is deemed to have occurred if the company’s activity significantly decreases in terms of assets, income or other economic operators. A substantial change in the management structure is deemed to have occurred if more than the half of the company’s managers are replaced. An exception applies if the share sale serves the restoration of a company. Special rules apply for corporate reorganisations, where the situation of all companies involved needs to be taken into account.
In the case of a sale of 95% or more of the shares in an Austrian company or partnership holding Austrian real estate, real estate transfer tax (RETT) is triggered, which should amount to 0.5% of the market value of the Austrian real estate. It has to be noted that there are grandfathering rules in place due to which the transfer of minority shares might also trigger RETT.
Formula apportionment is not accepted as a method to determine the profits of an Austrian affiliated enterprise. 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 for the services rendered 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, services that do not belong to the business focus of the affiliate rendering the services.
Borrowing by an Austrian subsidiary from 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 bank's business is to achieve profits from the borrowing 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 principally does not accept that a borrowing group entity charges a rate as high as the rate a bank would have charged to its customers. The effective interest rate applied for intra-group financings depends on various circumstances – eg, the liquidity of the Austrian company (the higher the liquidity, the lower the interest rate), the interest rates that would be offered to the foreign affiliate from Austrian and/or foreign banks, and whether the Austrian company had to refinance the loan.
Austrian corporations (ie, corporations 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 the 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, more than 15%) abroad. If a double taxation convention applies, the rules of the double taxation convention take precedence over the unilateral relief measures. However, due to the introduction of CFC rules that entered into force on 1 January 2019, the exemption of foreign permanent establishments’ profits are no longer applicable in the case of double taxation conventions regarding low taxed foreign permanent establishments (lower than 12.5%).
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 2020), 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 if the foreign company is taxed at a low rate abroad (not more than 12.5%) and mainly derives 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, which entered into force on 1 January 2019, the switch-over provision is no longer relevant for participations of 50% or more, as the scope of CFC legislation applies, 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 does not fall under the scope of the international participation privilege. The dividend exemption does not apply on qualified portfolio participations (participation of 5% or more) if the foreign company is taxed at a low rate abroad (not more than 12.5%) and mainly derives passive income.
In general, 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, which is subject to corporate income tax at the level of the Austrian corporation.
Austria has implemented CFC rules, which entered into force on 1 January 2019 and are based on the EU Anti-BEPS Directive. CFC rules 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 directly and indirectly held shares 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 nominal share capital, 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 ATAD, 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 when there is an effective tax rate abroad of 12.5% or below. Passive income is defined according to the catalogue of Art 7 (2) (a) of the EU Anti-BEPS Directive. Furthermore, there is an exception for foreign subsidiaries with substantive economic activity in certain fields.
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 and personnel, and must conduct an operative activity, or else dividend withholding tax has to be withheld on the dividends. 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 (which have meanwhile been adjusted to the ATAD) and the substance-over-form approach were applied by the Austrian tax authorities (and are still applicable next to the application of CFC rules) in relation to foreign subsidiaries of Austrian companies. 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. The general abuse rules will remain of importance even after the implementation of CFC rules, in cases where the CFC rules do not apply (eg, for individuals as shareholders of foreign companies).
As mentioned above, the CFC rules will not apply for foreign subsidiaries with substantive economic activity.
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, which is applicable on a participation in a foreign entity (which is either comparable to an Austrian company or a legal form enumerated in 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. The international participation exemption provides for the neutrality of the participation, which means that capital losses and impairments of the participation also have to be treated as neutral for corporate income tax purposes.
There is also an (irrevocable) option to opt for tax effectiveness of the participation in the CIT return of the year of the acquisition of the participation.
The exemption does not apply and is replaced by an indirect credit of the underlying foreign corporate taxes if the foreign corporate mainly generates low-taxed passive income. However, the switch-over provision is only relevant for participations of less than 50%, which are not covered by the general CFC legislation. The switch-over rules do not apply to the extent that profits were already attributed to the controlling entity based on the CFC rules.
The general anti-abuse provision was adjusted to the ATAD and considers legal schemes to be inappropriate if, disregarding the tax savings involved, they no longer seem reasonable because the essential purpose or one of the essential purposes is to obtain a tax advantage that is contrary to the objective or purpose of the applicable tax law in its entirety. 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, intra-group transactions and reorganisations.
The principle purpose test (PPT), as stipulated in Art 6 of the EU Anti-BEPS Directive, was implemented in Austria in 2019. Accordingly, a transaction is regarded as abusive if one of its principal purposes is the saving of taxes. Apart from looking through foreign base 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 saving of Austrian taxes.
After a tax decree has become final and binding on the side of the Austrian tax office, tax audits can be performed by the tax authorities until the statute of limitation has been reached. This is mostly the case after five years (with an extension of one year in case of external official acts by the tax authorities within these five years), 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.
Since 2019, large Austrian businesses (with an annual turnover of more than EUR40 million) with a high degree of compliance in the past and an appropriate internal control system have the possibility to opt for horizontal monitoring, according to which a constant control by the tax office will replace the traditional system of tax audits (upon election only).
Regarding BEPS Action 1, the Austrian parliament passed a Digital Tax Act in September 2019, no longer waiting for co-ordinated actions by the EU Member States. Under this new act (applicable from 1 January 2020), income from online advertising services of companies exceeding certain turnover thresholds is subject to a 3% digital tax.
As suggested by BEPS Action 2, Austria has implemented legislation to neutralise hybrid mismatches creating mismatch outcomes. The hybrid mismatch rules will enter into force in Austria on 1 January 2020, in line with the Anti-Tax Avoidance Directive ATAD II (EU 2017/952).
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-Tax Avoidance Directive ATAD (EU 2016/1164).
Austria has introduced the principle purpose test suggested by BEPS Action 6 in its domestic tax law, which also entered into force on 1 January 2019 and adapted the already existing general anti-abuse provision.
BEPS Action 12 was fully implemented by the Austrian legislator in September 2019, in the course of the transposition of the amendment to Directive 2011/16/EU (DAC6). This new regulation (EU-Meldepflichtgesetz) aims for the reporting of certain cross-border structures and transactions to the tax authorities, starting from 1 July 2020.
Austria has also fully implemented the OECD recommendations on Action 13 regarding the re-examination of transfer pricing documentation.
As recommended by BEPS Action 15, Austria has signed the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI), in the course of which a number of Austrian DTCs were adapted in the framework of the MLI to correspond to BEPS.
It is Austria’s intention to preferably fully implement the EU directives enacting the BEPS recommendations, as demonstrated, for example, by the four amendments of EU Directive 2011/16 on the Mutual Cooperation in the field of taxation as regards mandatory information exchange or the EU Anti-Tax Avoidance Directive ATAD (EU 2016/1164).
The Austrian government is seeking to achieve a uniform approach, implementing the OECD recommendations in the BEPS Action Plan and 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, it has to be expected that the Austrian measures will conform with the progress on an EU level.
International tax law is of high importance for Austria as a business location, as a lot of 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 countries in this respect and to negotiate and further extend the Austrian network of double tax treaties. This led 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 in most cases. This is also shown by the fact that Austria was the first country that submitted the ratification instrument of the MLI to the depositary.
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 like a swift group taxation regime, the possibilities of interest deduction and incentives for R&D. However, all of these are not preferential tax regimes and are not vulnerable to the BEPS approach.
On the one hand, the existing regime provides for the denial of the exemption of foreign dividends at a company level if the dividends are tax deductible in the state of the paying entity (Section 10 Par 4 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 below 10% abroad (Section 12 Par 1 Sub-par 10 CITA).
In addition to these existing provisions, proposals for dealing with hybrid mismatches have been implemented, targeting the neutralisation of so-called D/NI (Deduction/No Inclusion) and DD (Double Deduction). The law will be effective from 1 January 2020.
Austria's tax regime provides for the worldwide taxation of residents. However, due to the double tax treaty network, residents' income generated in foreign establishments may be exempt from tax. This is adapted by CFC rules in the case of passive low-taxed income of not more than 12.5%.
With regard to interest limitation rules, the Austrian Ministry of Finance took the position that the existing regime restricting interest and royalty deduction (non-deductibility if payments are made to a related party and are subject to low taxation) is "equally effective" to the rules set out in the ATAD. In July 2019, however, the EU Commission denied equivalence to said regulation and opened formal infringement proceedings against Austria. The reaction of the Austrian legislator concerning that matter remains to be seen.
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 an EU level by restricting them to a black-list of countries may be an alternative, but this was not provided in the ATAD. Regarding the possibilities of the ATAD, Austria opted for the catalogue of passive income (Art 7 (2) a ATAD) and not the option of inadequate arrangements (Art 7 (2) b ATAD).
Austria did not implement the LOB rules as provided in Action 6 of the BEPS initiative.
However, Austria did implement the PPT rule, with effect as of 1 January 2019. According to the explanatory notes of the relevant tax bill, the PPT rule is intended to be interpreted along the lines of the ECJ's case-law on the abuse of tax law. In the past, the Austrian Supreme Administrative Court used that same interpretation regarding the existing 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 not much need for adaptions is seen here. As regards the identification of intangibles, including intellectual property, Austria fully follows the interpretation of the OECD, as it is also laid down in chapter VI of the OECD Transfer Pricing Guidelines 2017.
Austria has implemented the special rules for the automatic information exchange on the country-by-country reports for large multinationals (ie, with consolidated group revenue of at least EUR750 million for accounting periods beginning on or after 1 January 2016), as provided for in BEPS Action 13. Due to the required size of the multinational enterprises, the Ministry of Finance expects that this obligation will only concern around 90 business entities in Austria.
The directives for the automatic exchange of information on tax rulings and on money laundering have been implemented in Austria. The EU-wide mandatory disclosure directive (2018/822/EU) amending Directive 2011/16/EU (DAC6), according to which taxpayers and their intermediaries have to report cross-border tax transactions, has been implemented with Austria's own regulation (EU-Meldepflichtgesetz).
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 of digital PEs (as a long-term solution). Regarding the provision for digital PEs, Austria has made no further specifications so far.
Regarding BEPS Action 1, the Austrian parliament passed a Digital Tax Act in September 2019, no longer waiting for co-ordinated actions by the EU Member States. Under this new act (applicable from 1 January 2020), income from online advertising services of companies exceeding certain turnover thresholds is subject to a 3% digital tax.
In January 2019, the Austrian Federal Government announced that it would no longer wait for co-ordinated actions regarding digital taxation by EU Member States, but would introduce unilateral measures. Consequently, in September 2019, the Austrian parliament passed a Digital Tax Act targeting online advertising services rendered against consideration in Austria. The aforementioned services are subject to a 3% digital tax, but only for companies exceeding certain thresholds for turnover from online advertising.
Despite the withholding tax provisions regarding income from royalties, there are currently no other provisions dealing with the taxation of offshore intellectual property.
There are no further remarks to be made.