Austria, one of the wealthiest countries in the world and an EU Member State, continues to attract investors due to its stable political and social situation and its geographical position in the centre of Europe. Apart from proximity, historical ties to the countries of Central and Eastern Europe (CEE) have made Austria a very attractive location for multinationals to choose as their base of operations regarding CEE.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
The most commonly used form of Austrian business organisation for inbound investments is the limited liability company (GmbH). Owing to its less burdensome corporate governance requirements, it is generally preferred by investors to the more complex stock corporation (AG), a corporate form that has to be used if a listing on a stock exchange is being considered.
Both entities are subject to Austrian corporate income tax on their income. Shareholders are taxed separately on dividends received from these corporations.
Partnerships, such as the general partnership (OG) or the limited partnership (KG), are of lesser relevance for inward investments into Austria. In a general partnership, all partners are subject to unlimited liability for the partnership’s debts and obligations, while in a limited partnership, only one partner must have unlimited liability. A structure commonly seen is the GmbH & Co KG; this is a limited partnership with the general partner being a limited liability company.
Partnerships are treated as transparent for Austrian tax purposes. Thus, the income of a partnership is not taxed at the level of the partnership, but rather attributed to its partners and subject to (corporate) income tax at the level of the partners.
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profit
Austrian tax-resident corporations are taxed on their worldwide income. The tax base for income from an active trade or business is generally the profit as shown in the financial statements. Adjustments have to be made where mandatory tax provisions deviate from financial accounting rules. Profits are generally taxed on an accruals basis.
As a general rule, expenses incurred in acquiring, securing and maintaining taxable income are tax deductible. The following types of expenses are, however, partly or fully non-deductible: restaurant expenses, penalties and fines, income taxes, remunerations paid to supervisory board members, remunerations paid to employees and managers exceeding €500,000 per person per year, and expenses in connection with earning tax-exempt income. As explained below in further detail, certain interest and royalty expenses may also be non-deductible.
Assets subject to wear and tear are in general depreciated on a straight-line basis over their ordinary useful life. If in the tax year of purchase or construction an asset is used for more than six months, the yearly depreciation amount applies; otherwise, only half of the yearly depreciation amount may be deducted from the tax base. Depreciation for extraordinary technical or economic loss in value is possible. For certain assets the statute mentions the depreciation rates to be used, namely buildings (generally 2.5 per cent), goodwill (6.67 per cent) and cars (12.5 per cent). Assets having an acquisition cost of not more than €400 can be fully depreciated in the year of purchase.
Only the following provisions are deductible for tax purposes: provisions for severance payments, provisions for pension payments, provisions for other contingent liabilities and provisions for anticipated losses from pending transactions.
Capital and income
Regarding Austrian tax-resident corporations, there is no distinction between the taxation of capital gains and the taxation of ordinary income in Austria. As regards personal income taxation, flat tax rates are applicable to specific types of income, including capital gains from the sale of financial assets and real estate (see below).
Under Austrian law, tax losses carried forward from past years reduce the corporate income tax base. The utilisation of such losses carried forward is limited to 75 per cent of the income of the respective year in the case of corporations (no time limit applies). A carry-back of losses is not permitted.
A corporation’s tax loss carry-forwards are forfeited upon an ownership change if there is a material change in its organisational (e.g., replacement of all directors of the corporation), economic (e.g., a new area of business is pursued by the corporation) and shareholder structure (e.g., the majority of shareholders of the corporation are replaced).
Corporate income tax is levied at a rate of 25 per cent. In the event that a corporation has not made a profit, a minimum corporate income tax in an amount of 5 per cent of the statutory minimum stated capital of a corporation is due. For example, in the case of a limited liability company this minimum corporate income tax generally amounts to €1,750 per year, and in the case of a stock corporation it amounts to €3,500 per year, with lower rates applying to limited liability companies for the first 10 years. Minimum corporate income tax is creditable against the final amount of corporate income tax assessed for that and the following tax years. Apart from corporate income tax, no other taxes or surcharges are levied on a corporation’s income.
The tax year is generally the calendar year. Corporations may, however, apply to the tax authorities for permission to use a different tax year, if reasons other than tax considerations exist for such application.
Corporate income tax returns must be filed electronically by 30 June of the year following the tax year (in the case of paper-based filings, the deadline is 30 April). Taxpayers making use of tax advisers benefit from longer deadlines. An extension of the filing date is possible in justified cases. Failure to file generally triggers a penalty.
Quarterly pre-payments of corporate income tax are due on 15 February, 15 May, 15 August and 15 November. Such pre-payments are creditable against the final amount of tax assessed. Any balance is payable within one month after receipt of the tax assessment notice.
Assessment notices of the competent tax office can be challenged before the Austrian Federal Tax Court.
Austria has a group taxation regime for affiliated companies. Affiliated companies are those that are connected through a direct or indirect participation of more than 50 per cent of the nominal capital and voting power. Such participation must exist throughout the entire fiscal year of the member of the tax group (and in total for at least three years).
The formation of a tax group results in 100 per cent of the taxable income of each resident member of the group being attributed to the top-tier company in the tax group. In the case of non-resident companies that are members of a tax group, only negative income of such companies is attributed to the top-tier company, and only on a pro rata basis (this makes the utilisation of foreign losses possible; note that this is only of a temporary nature, with a claw-back provision applying). In the case of losses of non-resident companies there is a limitation insofar as only losses amounting to 75 per cent of the sum of the income of the top-tier company in a tax group and the Austrian-resident members of the tax group may be offset immediately.
ii Other relevant taxes
Value added tax
Austria levies value added tax in line with the pertinent EU directives at a standard rate of 20 per cent. Reduced rates of 10 and 13 per cent apply to certain supplies. There are a number of exemptions applicable (e.g., for financial services and health services).
Real estate transfer tax
The transfer of Austrian real estate triggers real estate transfer tax. In the case of a sale of Austrian real estate the tax base is generally the purchase price, and the tax rate amounts to 3.5 per cent. In addition, a 1.1 per cent court registration fee based on the fair market value of the property transferred falls due.
Further, real estate transfer tax at a rate of 0.5 per cent of the fair market value of the real estate is triggered if Austrian real estate is part of the assets of a corporation, and at least 95 per cent of the shares in such corporation are pooled in the hand of a single buyer or in the hand of a tax group. The same applies in the case of a partnership holding Austrian real estate if at least 95 per cent of the interests in such partnership are transferred to new partners within a period of five years.
Austria levies stamp duties on a wide range of legal transactions, including, inter alia, assignment agreements, lease agreements and surety agreements, if a written deed evidencing such stamp-dutiable transaction is signed and a certain Austrian nexus exists. However, these stamp duties can in many cases be avoided by way of careful structuring.
Austria levies a bank tax on the adjusted balance sheet total of credit institutions licensed pursuant to the Austrian Banking Act and foreign credit institutions authorised under the Austrian Banking Act to carry out banking business in Austria by way of a branch (in the case of the latter, only the balance sheet total attributable to the Austrian operations is taken into account).
While income tax is levied by way of assessment, income tax on employment income is in general levied by way of withholding by the employer (provided that the employer has a permanent establishment in Austria). Such wage tax is a prepayment of the employee’s final income tax and is credited against the employee’s assessed income tax liability if the taxpayer files (voluntarily or in certain cases on an obligatory basis) an annual tax return.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Corporations having their legal seat, their place of effective management, or both, in Austria are deemed to be tax residents of Austria, and are thus subject to unlimited corporate income tax in Austria on their worldwide income. The legal seat of a corporation is the place defined as such by law, by contractual agreement, in its articles of association, etc. The place of effective management of a corporation is the place where all the measures are taken that are required and essential for the management of the corporation.
ii Branch or permanent establishment
Corporations having neither their legal seat nor their place of effective management in Austria are taxable only on specific types of income with an Austrian nexus, which are exhaustively
enumerated in the statute. This, inter alia, includes income from an Austrian permanent establishment, which is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried out. A permanent establishment for Austrian domestic tax purposes is quite similar to the OECD concept.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Under the national participation exemption, dividends received by an Austrian corporation from its Austrian subsidiary are exempt from corporate income tax regardless of the extent of the participation or the holding period.
Under the international qualified participation exemption, an Austrian corporation is exempt from corporate income tax on dividends received from a foreign subsidiary or capital gains realised on the alienation of shares in that foreign subsidiary if the parent demonstrably holds a participation of at least 10 per cent of the stated share capital of the foreign subsidiary for a minimum duration of one year, and if the foreign subsidiary qualifies as a company of a Member State pursuant to Article 2 of the EU Parent–Subsidiary Directive or is legally comparable to an Austrian corporation.
Under the international portfolio participation exemption, an Austrian corporation is exempt from corporate income tax on dividends received from a foreign subsidiary, regardless of the participation or the holding period, if the Austrian international qualified participation exemption outlined above is not applicable, and if the foreign subsidiary qualifies as a company of a Member State pursuant to Article 2 of the EU Parent–Subsidiary Directive or is legally comparable to an Austrian corporation and has its legal seat in a state with which Austria has agreed to the comprehensive exchange of information. This exemption does not cover capital gains.
Both the international qualified participation exemption and the international portfolio participation exemption are subject to special anti-abuse provisions outlined below. Further, these two exemptions do not apply to payments received from foreign subsidiaries under hybrid instruments if such payments are tax deductible at the level of the foreign subsidiary.
ii IP regimes
Austrian tax law provides that companies conducting qualified research and development activities may claim a credit (over and above the full deduction of the expense) equal to 12 per cent of eligible expenses.
VI WITHHOLDING TAXES
i Withholding on outward-bound payments
Dividends distributed by Austrian corporations to their (resident or non-resident) shareholders are subject to Austrian withholding tax at a rate of generally 27.5 per cent.
Royalties paid to non-residents are subject to Austrian withholding tax at a rate of 20 per cent.
Interest on loans (not in the form of bonds) is not subject to Austrian withholding tax.
Certain services rendered by non-residents are subject to Austrian withholding tax at a rate of 20 per cent. This category includes:
- a remunerations in connection with an occupation as an author, lecturer, artist, architect, sportsperson or performer in Austria;
- b payment for a right of use regarding works protected by copyrights or industrial property rights;
- c supervisory board remunerations; and
- d payment for commercial or technical consulting work.
ii Domestic law exemptions from withholding
As an EU Member State, Austria applies the EU Parent–Subsidiary Directive and the EU Interest and Royalties Directive.
Pursuant to the Austrian provisions implementing the EU Parent–Subsidiary Directive, the distribution of dividends is fully exempt from Austrian withholding tax if the recipient of the dividends is a company of a Member State pursuant to Article 2 of the EU Parent–Subsidiary Directive that has held at least 10 per cent of the capital in the paying company for an uninterrupted period of at least one year and meets certain substance requirements.
Similarly, pursuant to the Austrian provisions implementing the EU Interest and Royalties Directive, the payment of royalties is fully exempt from Austrian withholding tax if the recipient of the royalties is an associated company of another Member State. A company is an associated company of a second company if, at least, the first company has a direct minimum holding of 25 per cent in the capital of the second company or the second company has a direct minimum holding of 25 per cent in the capital of the first company, or a third company has a direct minimum holding of 25 per cent both in the capital of the first company and in the capital of the second company. Such holdings must apply for an uninterrupted period of at least one year.
iii Double tax treaties
There are currently 87 treaties in force in Austria. Austria generally follows the OECD Model Convention and the commentary thereto in respect of its treaty policy and interpretation. Since under Austrian rules of interpretation the more specific provision takes precedence over the more general provision, double tax treaties generally take priority over domestic law.
VII TAXATION OF FUNDING STRUCTURES
i Thin capitalisation
There are no statutory thin capitalisation rules in Austria. However, the Austrian Supreme Administrative Court has established certain broad guidelines that are used to determine whether the equity funding at hand is adequate for the purposes of taxation. If the equity is inadequate, a portion of the indebtedness to shareholders may be regarded as the equivalent of shareholders’ equity. Interest paid on such debt may not be deducted from the taxable income and may be subject to withholding. In practice, debt-to-equity ratios of 4:1 are not uncommon.
ii Deduction of finance costs
In general, interest (including interest incurred in connection with the acquisition of an Austrian or non-Austrian participation) may be fully deducted from a corporation’s tax base. Two restrictions regarding deductibility apply.
Firstly, financing costs incurred in connection with the acquisition of shares that were directly or indirectly purchased from a group company or from a controlling shareholder are not deductible.
Second, no deduction is possible for interest paid to a corporation if the payer and recipient are, directly or indirectly, part of the same group, or have, directly or indirectly, the same controlling shareholder; and the interest paid at the level of the recipient (or the beneficial owner, if different) is:
- a not subject to corporate income tax due to a comprehensive personal or material tax exemption;
- b subject to corporate income tax at a rate of less than 10 per cent;
- c subject to an effective tax rate of less than 10 per cent due to an applicable reduction; or
- d subject to a tax rate of less than 10 per cent due to a tax refund (here, tax refunds to the shareholder are also relevant).
- The latter provision also applies to royalties.
iii Restrictions on payments
Under Austrian corporate law, Austrian corporations may only pay out dividends to their shareholders to the extent they have sufficient balance sheet profits.
iv Return of capital
As mentioned above, dividends paid out by Austrian corporations to shareholders trigger a withholding tax of generally 27.5 per cent. However, the repayment of capital – whether resulting from a formal capital reduction or from the distribution of capital reserves – does not trigger withholding tax under Austrian domestic law. Such repayment of capital reduces the tax basis of the shares (which might be relevant in the case of a later sale: if the repayment of capital exceeds the tax basis, the excess is considered a capital gain, which is generally taxable). Austrian companies must keep a capital account for tax purposes to document the amount distributable as a repayment of capital.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Austrian businesses are typically acquired by way of a share deal (rather than by way of an asset deal), with the shares in the Austrian company being purchased by a special purpose vehicle in a country with a favourable participation exemption.
Under Austrian corporate law, many types of reorganisations are possible, including mergers, demergers, conversions of partnerships into corporations and vice versa, and share-for-
While such transactions would under the general tax law rules normally constitute a taxable event (making them prohibitively expensive), the Austrian Reorganisation Tax Act allows such restructurings to be carried out in a tax-free manner if certain prerequisites are met.
If, owing to the relocation of a business abroad, Austria loses its right to tax hidden reserves contained in these assets, then corporate income tax is generally triggered on the hidden reserves at the time of exit. Relief might be possible if Austria’s right to tax is lost as regards an EU Member State or a state that is a party to the Agreement on the European Economic Area.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Under Austrian tax law, there is the principle that taxpayers are free to arrange their economic affairs in the manner they deem most beneficial to themselves, which includes choosing those structures and approaches that incur the least tax costs. Nevertheless, Austrian law contains a general anti-abuse provision pursuant to which one’s tax liability cannot be avoided by abusing the legal forms or methods available under civil law. If such an abuse has been established, the tax authorities may compute the tax at the amount it would have been had such abuse not occurred. Additionally, an action not seriously intended by the parties (i.e., sham transaction) but performed only to cover up facts that are relevant for tax purposes will be disregarded and the applicable taxes will be based on the facts the taxpayer sought to conceal. In addition, various specific anti-abuse provisions exist, for example, switchover clauses in connection with the international participation exemptions discussed immediately below.
ii Controlled foreign corporations (CFCs)
Since Austria has no CFC legislation, the Austrian legislator had to prevent taxpayers from transferring excess liquidity to low-taxed foreign subsidiaries and from repatriating the resulting income in a tax-free manner (thus eroding Austria’s tax base). This was achieved through two special anti-abuse provisions.
In respect of the international qualified participation exemption, dividends and capital gains are exceptionally taxed (credit is given for underlying taxes in the case of dividends) in cases of abuse of tax law if both of the following two criteria are fulfilled or if one of the following two criteria is ‘strongly’ fulfilled and the other is ‘nearly’ fulfilled:
- a the foreign subsidiary predominantly focuses on earning, directly or indirectly, interest income, income from the letting of moveable tangible or intangible assets, or income from the sale of participations (other than those falling within the scope of the international qualified participation regime); and
- b the foreign subsidiary’s income is not subject to foreign tax comparable to the Austrian corporate income tax either with respect to the calculation of the taxable basis or with respect to the applicable tax rates.
In respect of the international portfolio participation exemption, dividends are exceptionally taxed (credit is given for underlying taxes) if the foreign subsidiary is not subject to a corporate income tax in its state of residence that is comparable to the Austrian corporate income tax, subject to a corporate income tax that is comparable to the Austrian corporate income tax at a rate of less than 15 per cent, or subject to a comprehensive exemption from taxation in its country of residence.
iii Transfer pricing
Pursuant to the case law of the Austrian Supreme Administrative Court, agreements between related parties (e.g., between the shareholder and its company) are only recognised for tax purposes if they have been concluded in writing, if their content is unambiguous and if they have been concluded in accordance with the arm’s-length principle (i.e., on terms that unrelated parties would have agreed upon). The Austrian tax authorities in practice follow the OECD Transfer Pricing Guidelines in this respect. Historically, there were only a few Austrian statutory provisions dealing specifically with transfer pricing. However, the Austrian Transfer Pricing Documentation Act was passed in 2016. Pursuant thereto, multinational groups with consolidated group revenues of at least €750 million in the preceding fiscal year are required to prepare a country-by-country report, which Austria will automatically exchange with other countries. Additionally, the Act introduces the obligation of a separate business unit (which is tax resident in Austria and which has had revenues of at least €50 million in the two preceding fiscal years) of a multinational group to prepare transfer pricing documentation in the form of a master file and a local file.
iv Tax clearances and rulings
A legally binding formal tax ruling procedure exists in connection with questions concerning restructurings, tax groups and transfer pricing. If certain formal prerequisites are met, the competent tax office must issue a tax ruling. This ruling has to contain the facts and statutory provisions on which it is based, a legal assessment of the facts and the time frame during which it is valid. In addition, the applicant may be required to report on whether the facts of the case have been implemented and also on whether the implemented facts are different from those outlined in the request. A fee of between €1,500 and €20,000, depending on the applicant’s annual turnover, is due in conjunction with any such request.
X YEAR IN REVIEW
The Austrian legislator was not as active in 2016 as it has been in past years. Most of the tax laws passed in that year were the result of EU developments or developments at an international level.
XI OUTLOOK AND CONCLUSIONS
Austria, as a wealthy and sophisticated jurisdiction with a stable political system in the centre of the EU, will remain a strong candidate for inward investment for years to come.
1 Niklas JRM Schmidt is a partner and Eva Stadler is a senior associate at Wolf Theiss.