The Inward Investment and International Taxation Review: Austria
Austria is generally a business and investment-friendly country. There is a relatively large extent of legal security. The institutions, including tax authorities and tax courts, work thoroughly and reliably. There is a written tax code that is accompanied by interpretation guidelines for the tax authorities, which are, however, not binding for the courts.
Due to its group taxation regime, international participation exemption, membership in the European Union (EU) and wide network of double tax treaties, Austria is an attractive location for holding companies. Also, there is no property tax or trade tax in Austria.
As of the beginning of 2020, Austria is governed by a coalition of the conservative party and the green party. There are plans for tax reforms (e.g., decrease of the corporate income tax rate, harmonisation of commercial and tax accounting rules). The timing for their implementation is, however, unknown and might be delayed because of the covid-19 crisis. In contrast, the covid-19 crisis led to various changes in the tax law, aimed at easing the economic impact on taxpayers.
Common forms of business organisation and their tax treatment
A business may be operated by an individual directly (single entrepreneur), by a partnership, or by a corporation. Private foundations are not allowed to run a business, but they can own company shares and fulfill a holding function.
There are two main forms of corporations in Austria. The limited liability company (GmbH) and the stock corporation (AG). The GmbH is subject to less burdensome corporate governance requirements and requires a lower minimum capital. However, its shares can only be transferred through a notarial deed. For a stock exchange listing, the corporate form of an AG has to be chosen.
Corporations are tax subjects. Their shareholders are taxed separately and only in case of profit distributions.
Non-corporate forms of business organisation are typically partnerships. There are two main forms of partnerships in Austria: the general partnership (OG) and the limited partnership (KG). In an OG, all partners have full liability. In a KG, there are general partners and limited partners. The general partners have full liability. The limited partners are only liable up to their liability contribution. A very common structure is the GmbH & Co KG. This is a limited partnership with the general partner being a limited liability company.
Partnerships are fiscally transparent. The income is not taxed at the level of the partnership, but at the level of the partners. However, the partnership has to file a tax return and is issued a tax assessment. The corporate or personal income tax assessments of the partners are derived from the partnership's tax assessment.
Direct taxation of businesses
i Tax on profits
Determination of taxable profit
Resident taxpayers are taxed on their worldwide income. Taxable profits are derived from the accounting profits, which are generally based on accruals. Through the effective tax reconciliation, accounting profits are adjusted to follow mandatory tax rules that differ from the accounting rules. For example, corporate dividend income is mostly tax-exempt, which leads to a deduction from the accounting profits. On the contrary, accounting profits might be increased with regard to, for example, amortisation periods, the recognition or amount of provisions, or non-deductible expenses.
Business expenses are those expenses that are caused by the business. Non-deductible expenses include representation costs, half of hospitality costs (reduced to 25 per cent by 31 December 2020 because of the covid-19 crisis), fines and penalties, income taxes, half of the payments to members of the supervisory board, and payments over €500,000 for personal services (e.g., employees, managing directors) per person and year. Expenses in direct connection with tax-exempt income are also non-deductible. However, despite the tax exemption for inter-company dividends, interest for the acquisition of inter-company shareholdings is deductible. On the contrary, a deduction is denied if the shareholding is acquired within a group of companies. There is also no deduction for interest or royalties that are paid within a group of companies and are tax-exempt or taxed with less than 10 per cent at the level of the receiving company. Last, there are several rules limiting the tax-deductible depreciation of inter-company shareholdings.
The acquisition costs of business assets that are subject to wear and tear for a period of more than a year must be depreciated over their useful life. Depreciation is generally linear, but the possibility of a degressive depreciation was introduced because of the covid-19 crisis as of 1 July 2020. There are statutory depreciation periods for buildings (40 years; 66.67 years for domiciles), goodwill (15 years) and vehicles (eight years). Assets having an acquisition cost of not more than €800 can be fully depreciated in the year of purchase. The valuation of business assets at the end of the business year might lead to an extraordinary depreciation or an amortisation up to the (ordinarily depreciated) acquisition costs.
Capital and income
For corporate taxpayers, all income (including capital profit) is considered business income. For other businesses, any capital profit arising from business assets is also considered business income, but is subject to a flat tax of 27.5 per cent (25 per cent for bank interest) if derived by an individual (also if operating in the form of a partnership).
Losses from capital that would be covered by the above-mentioned flat tax (only applicable to individuals) can only be balanced at the end of the business year with other business income in the extent of 55 per cent of the losses.
Losses in connection with business income may be carried forward indefinitely. For corporations, losses may only be deducted up to 75 per cent of business income, subject to certain exceptions (inter alia, liquidation, insolvency). For losses from the year 2020, a loss carry-back was introduced because of the covid-19 crisis.
The deduction of losses is denied in the case of a shell company purchase, which occurs in case of a substantial change in the organisational and economic structure of the corporate taxpayer together with a paid substantial change in the shareholder structure. An exception applies in case of a financial reorganisation that should save a substantial number of jobs.
The corporate income tax rate is 25 per cent. There is a minimum corporate income tax for resident taxpayers. For AG it is €3,500 per year. For GmbH it is €1,750 per year, however, reduced to €500 in the first five years and €1,000 in the subsequent five years. The minimum corporate income tax can be credited against later corporate income tax liabilities.
Personal income tax rates are progressive up to 55 per cent (for income >€1 million).
An income tax return has to be filed electronically by end of June for the previous year. If the taxpayer is represented by a tax adviser, the deadline is extended to the end of March of the second-following year. The tax year usually coincides with the calendar year. Corporations and certain individuals may apply for a different tax year. The income tax liability is determined in a tax assessment and becomes due one month after its issuance. Income tax prepayments are based on the income tax of previous years and are due in the middle of each quarter. They are credited against the final income tax liability.
Income taxes are federal taxes in Austria. As of 2021, there will be only two tax authorities: one general tax authority and one tax authority for large businesses (i.e., financial institutions, private foundations, members of a tax group, taxpayers with >€10 million in revenues, covered in a country-by-country report, or subject to horizontal monitoring).
There is no regular routine for tax audits. The tax audits are conducted by the tax authorities described in the last paragraph. As of 2021, there will be a separate audit authority for wage-related taxes and contributions. Since 2019, businesses have been able to apply for horizontal monitoring instead of tax audits. This leads to a permanent contact between the taxpayer and the tax authorities and implies an increased disclosure obligation on behalf of the taxpayer. In return, the tax authorities have to give advice regarding the taxpayer's situation, whether facts and circumstances have already been fulfilled or are planned.
For all taxpayers, there is the possibility of a binding ruling from the tax authorities. However, only planned tax cases can be covered, which must concern one of the following areas: tax reorganisations, tax groups, international tax law, value added tax (VAT) law, or the existence of tax abuse. Besides, non-binding rulings may be obtained from the tax authorities that may be relied on in good faith. Cases concerning international tax law may also be directed to the Ministry of Finance, which makes its assessment of the case publicly available in an anonymous way.
Tax assessments may be challenged before the Austrian Federal Tax Court within one month. The tax court is independent from the tax authorities. The tax court may waive the tax assessment and direct the case back to the tax authorities if the facts of the case have not been fully or correctly determined. Otherwise, the tax court decides the case itself and may change or waive the tax assessment. Against judgments of the tax court, appeals to the Supreme Administrative Court or the Supreme Constitutional Court may be possible within a period of six weeks.
A tax group for corporate income tax purposes can be applied for under the following conditions:
- group parent may be a resident or a non-resident from the EU or European Economic Area (EEA) with a registered branch in Austria;
- group members may be residents or non-residents from the EU or a country that provides comprehensive mutual assistance (only direct subsidiaries of resident taxpayers);
- >50 per cent in capital and voting rights during the whole tax year;
- agreement on tax clearance between the resident group members and the group parent; and
- minimum period of existence of three years.
Within a tax group, there is a full consolidation of profits and losses between resident companies. With regard to non-resident group members, only losses – not profits – can be attributed to the group parent in the extent of its own and all the group members' shareholdings. Losses of non-resident group members are only deductible up to 75 per cent of the resident group members' and the group parent's income per year. The exceeding amount can be carried forward. In case of a possible loss utilisation abroad or an exit from the tax group, the losses of non-resident group members are recaptured.
ii Other relevant taxes
Employment income is taxed by way of withholding. This wage tax is a mere collection form for the personal income tax and may be credited against the employee's assessed income tax liability. If wage tax has been withheld and the taxpayer earns no other income, no personal income tax return has to be filed.
VAT law is harmonised to a great extent within the EU. VAT exemptions are granted for, inter alia, financial services, the sale of immovable property, certain letting of immovable property, health services and small businesses. Austria levies VAT at a standard rate of 20 per cent. Reduced rates of 10 per cent and 13 per cent apply to certain supplies. A reduced rate of 5 per cent was introduced because of the covid-19 crisis for certain affected industries (e.g., hotels, culture), currently applicable until the end of 2021.
Austria levies stamp duties on a wide range of legal transactions, including, inter alia, surety agreements, lease agreements, out-of-court settlements and assignment agreements. The prerequisites for the stamp duty are a written and signed deed evidencing the transaction and a certain Austrian nexus. However, these stamp duties can in many cases be avoided by way of careful structuring.
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 or a partnership, and at least 95 per cent of the shares in such corporation or interests in such partnership 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 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).
Tax residence and fiscal domicile
i Corporate residence
A company is resident in Austria and thus subject to unlimited tax liability covering its worldwide income if it as either its place of management or its seat in Austria. The place of management is where the center of commercial direction is located. In case of more than one member of the management board, the location of board meetings is usually considered decisive.
ii Branch or permanent establishment
Branches will typically constitute a permanent establishment for tax purposes, as do factories, warehouses or shops. In general, a permanent establishment is a fixed place of business through which a business is carried out. It needs to have a certain connection to the ground and exist for a certain duration (six months are taken as a guideline). If a non-resident business has a permanent establishment in Austria, the income that is attributable to this permanent establishment is taxable in Austria. Austrian double tax treaties widely follow the Model Tax Convention on Income and on Capital of the Organisation for Economic Co-operation and Development (OECD) as regards the definition of a permanent establishment and the attribution of income to permanent establishments. According to the latter, the permanent establishment is treated like an independent enterprise.
Tax incentives, special regimes and relief that may encourage inward investment
i Holding company regimes
Austria provides for a broad participation exemption regime. It covers all domestic and inbound dividends, except from shareholdings below 10 per cent from a company resident in a country that does not provide comprehensive mutual assistance. Moreover, there is a tax exemption for capital gains from a shareholding in a non-resident corporation of minimum 10 per cent, which is held for a minimum period of one year.
ii IP regimes
There is no special IP regime in Austria.
iii State aid
State aid is regulated by European Law and generally disallowed. There are certain exceptions, e.g., in case of natural catastrophes and exceptional events. The covid-19 pandemic was covered by this exception.
Austrian tax law provides that taxpayers conducting qualified research and development activities may claim a credit (over and above the full deduction of the expense) equal to 14 per cent of eligible expenses. From September 2020 to February 2021, a cash investment premium of 7 per cent (14 per cent for certain investments, such as health) is granted.
Withholding and taxation of non-local source income streams
i Withholding outward-bound payments (domestic law)
In general, Austria levies withholding taxes on dividends, interest and outward-bound royalties. The dividend withholding tax rate is 27.5 per cent. If paid to a company, the withholding tax is reduced to 25 per cent. Interest on inter-company loans is not subject to withholding taxes. Royalties – if paid to a non-resident – are subject to a 20 per cent withholding tax (25 per cent if directly connected expenses are deducted; applicable only for EU/EEA residents).
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Based on the EU Parent-Subsidiary Directive, outward-bound dividends are tax exempt if paid to an EU company with a shareholding of minimum 10 per cent, which is held for a minimum period of one year. Outward-bound interest on inter-company loans is generally tax-exempt. Based on the EU Interest and Royalties Directive, outward-bound royalties are tax-exempt if paid to an affiliated EU company (parent company, subsidiary or sister company with minimum 25 per cent shareholding for a minimum period of one year).
iii Double tax treaties
Austria has concluded double tax treaties with more than 90 countries. Double tax treaties generally limit the source state's taxing right on dividends, interest and royalties. Several Austrian double tax treaties grant an exemption for inter-company outward-bound dividends. Many Austrian double tax treaties provide for a tax exemption for royalties in the source state. The following table gives an overview of the source state taxing rights under the double tax treaties with certain selected non-EU countries:
iv Taxation on receipt
Inter-company dividends are granted a broad tax exemption (see Section V.i). There is a switch-over to the credit method for foreign shareholdings of at least 5 per cent, if the foreign company is subject to low taxation (12.5 per cent or below) and its business focus is earning passive income (inter alia, interest, royalties, taxable dividends or capital gains, insurance or bank income). The underlying corporate income tax may be credited and may also be carried forward. Subordinately, also the source state tax on the dividend may be credited in the respective year.
Taxation of funding structures
In Austria, it is up to each taxpayer to fund its business with equity or with debt. Typically, Austrian companies are predominantly debt-funded.
i Thin capitalisation
There are no statutory thin capitalisation rules in Austria. Under certain conditions, shareholder debt can be requalified into hidden equity. The Austrian Supreme Administrative Court requires the fulfillment of the following conditions for a recognition of the shareholder loan: (1) clarity, publicity and transparency of the loan agreement; (2) market conditions of the loan agreement details; and (3) an economically adequate amount of equity. A debt-to-equity ratio of 4:1 or 3:1 should be adequate.
ii Deduction of finance costs
In general, interest and finance costs are deductible business expenses. For loans from affiliated companies, transfer pricing rules have to be considered. Thus, interest must be at arm's length.
The interest barrier rule of the EU Anti-Tax Avoidance Directive shall be introduced as of 1 January 2021.
Interest for the debt-financed acquisition of inter-company shareholdings is deductible in spite of the participation exemption. However, this exception does not apply to fees and related costs. Moreover, a deduction of interest is denied if the shareholding was acquired from an affiliated company or from a controlling shareholder. There is also no deduction for interest that is paid within a group of companies and tax-exempt or taxed with less than 10 per cent at the level of the receiving company (see Section III.i).
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. For tax purposes, corporations have to keep evidence accounts on their internal financing to determine the maximum amount of payable dividends.
iv Return of capital
Under Austrian corporate law, capital can be repaid by a formal capital reduction or by the distribution of capital reserves. In contrast to dividends that are taxed at 27.5 per cent if derived by an individual or tax-exempt if derived by a corporate taxpayer (for exceptions, see Section V.i), the return of capital does not directly trigger any taxation. Rather, it reduces the acquisition costs of the shareholding. Only to the extent that repaid capital exceeds the acquisitions costs, is it considered a capital gain. Otherwise, the subsequent income from the sale of the shareholding will be affected by lower acquisition costs. Corporations have to keep evidence accounts on their contributed capital to determine the maximum amount of payable capital returns.
Acquisition structures, restructuring and exit charges
A typical acquisition structure is a share deal through an Austrian holding company as special purpose vehicle (SPV). The Austrian holding company can benefit from the participation exemption and the group taxation regime. Typically, the acquisition is financed by both equity and external debt. A debt push-down may be achieved by either forming a tax group or by merging the Austrian holding company with the Austrian target company. The seller will be taxed on the capital gain with corporate income tax or the flat tax for capital gains (individuals as sellers). In case of an asset deal, there are certain tax benefits for the seller and the buyer may depreciate the business assets (including goodwill).
National mergers and demergers can be conducted as tax-neutral. If the Austrian taxing right ceases to exist, i.e., in case of an export (de)merger, there is no tax neutrality and the hidden reserves are taxed. If the absorbing entity in a merger is resident in an EU or EEA Member State, the taxpayer can apply for a payment in installments in its annual tax return. The installments are spread over five years for capital assets and over two years for current assets.
If a business relocates to another country, the hidden reserves in the business assets are taxed. If the target country is an EU or EEA Member State, the taxpayer can apply for a payment in installments in its annual tax return (five years for capital assets; two years for current assets).
Anti-avoidance and other relevant legislation
i General anti-avoidance
In general, taxpayers are free to arrange their affairs as they wish and to choose the most beneficial options, including the most tax-efficient ones. The codified Austrian general anti-avoidance rule has been changed in 2018 to be fully in line with the text of the EU Anti-Tax Avoidance Directive. Accordingly, 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 as it would have been had a genuine legal arrangement been carried out. Additionally, an action not seriously intended by the parties (i.e., a sham transaction) but performed only to cover up facts that are relevant for tax purposes will be disregarded and taxation will be based on the facts the taxpayer sought to conceal.
Doing business in low-tax jurisdictions is not considered abusive as such. However, a low level of taxation in an involved country might trigger special tax consequences in certain cases. Such include controlled foreign corporation (CFC) rules (see next sub-section), the switch-over to the credit method in case of inter-company dividends (see Section VI.iv), and the non-deductibility of intra-group interest or royalty payments (see Section III.i).
ii Controlled foreign corporations
Austria has introduced CFC rules in 2018 to comply with the EU Anti-Tax Avoidance Directive. Accordingly, passive income of a low-taxed CFC is to be included in the tax base of the controlling corporation. Passive income includes interest, royalties, taxable dividends or capital gains, insurance or bank income. Low taxation means income taxation of 12.5 per cent or less. An inclusion of passive income in the tax base of the controlling corporation takes place if:
- the passive income of the CFC exceeds one-third of its total income;
- the controlling corporation – alone or together with its associated enterprises (25 per cent relation as subsequently described) – holds a direct or indirect participation of more than 50 per cent of the voting rights or owns, directly or indirectly, more than 50 per cent of the capital or is entitled to receive more than 50 per cent of the profits of the CFC; and
- the CFC does not carry out a substantive economic activity supported by staff, equipment, assets and premises (in case a substantive economic activity exists, the controlling corporation has to furnish proof thereof).
The inclusion of passive income in the tax base of the controlling corporation is calculated according to the profit entitlement in the CFC. Losses from passive income are not included.
iii Transfer pricing
Austria does not have codified material transfer pricing rules. According to the case law of the Supreme Administrative Court, agreements between a company and its shareholders have to fulfill the following requirements to be recognised for tax purposes: (1) they must be concluded in writing; (2) their content must be unambiguous; and (3) they must be concluded in accordance with the arm's-length principle. The Austrian Ministry of Finance has issued internal guidelines on transfer pricing, which are based on the OECD Transfer Pricing Guidelines. With regard to formal requirements, the Austrian Transfer Pricing Documentation Act provides that 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 obliges a separate business unit (that is tax-resident in Austria and that 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
Binding rulings from the tax authorities can be obtained with regard to tax reorganisations, tax groups, international tax law, VAT law, or the existence of tax abuse (see Section III.i). The application for a tax ruling has to be made concerning cases that are not yet fulfilled. If certain formal prerequisites are met, the competent tax office must issue a tax ruling, generally within a period of two months from application. 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 subsequently 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.
Year in review
The tax policy in the year 2020 was dominated by mitigating the economic effects of the covid-19 crisis. The Austrian lawmaker has implemented a great number of tax regulations in response to the crisis, inter alia:
- a loss carry-back to the year 2019;
- the possibility of a degressive depreciation as of 2020;
- a higher deductibility of hospitality costs;
- a further reduced VAT rate of 5 per cent for especially affected industries;
- a cash investment premium; and
- a decrease of the tax rate for the lowest income tax bracket from 25 per cent to 20 per cent.
The European Union Directive 2018/822 (DAC 6) has been implemented in Austria through the EU Notification Obligation Act. The first notifications on cross-border tax structuring had to be submitted by 31 October 2020.
At the very end of the year, the interest barrier rule was introduced, which will be effective as of 2021.
Outlook and conclusions
It remains to be seen how the covid-19 crisis will develop. The Austrian budget is under great pressure. Thus, it is unclear whether planned measures will actually be implemented. The new government's programme that was drafted at the beginning of 2020 includes the following tax measures:
- a decrease of the corporate income tax rate from 25 per cent to 21 per cent;
- abolition of the minimum corporate income tax;
- evaluation and simpler administration of the return of capital;
- tax incentives for a profit participation of employees;
- the taxation and tax administration of partnerships should become easier and more attractive;
- legal right to a tax audit;
- faster and more efficient tax procedures;
- easier payment of tax liabilities; and
- a further decrease of progressive income tax rates.
1 Andreas Baumann is a partner and Karin Spindler-Simader is counsel at PHH Tax. The authors would like to acknowledge that this chapter is in some parts based on the information included in the previous edition (NJRM Schmidt and E Stadler, 'Austria', The Inward Investment and International Taxation Law Review, edition 10).