Substantial changes to Austria’s international tax law rules
On April 9, the Austrian Ministry of Finance has published the draft bill for the Annual Tax Act 2018 (Jahressteuergesetz 2018) which includes substantial changes to Austria’s international tax law rules. In particular and most prominently, the draft includes a new CFC-regime as a first step in implementing Articles 7 and 8 of the EU Anti-Tax Avoidance Directive (“ATAD”) (EU) 2016/1164 in order to meet the deadline of 1 January 2019 as set by the Directive.
Other tax law changes that are important from an international perspective are changes to the provisions concerning the international participation exemption and the exemption of dividends derived from portfolio investments, the enlargement of the scope of binding rulings, the shortening of the period for installment payment upon an exit taxation from seven to five years and amendments to the Austrian general anti-avoidance rule in light of Article 6 of the ATAD.
B. Draft Austrian CFC-Regime
1. The General Concept = Option (a)
Between the two options ATAD provides for the concept of a CFC-regime, Austria chose version (a), i.e. applying the CFC-inclusion rules for low taxed passive income. Opposed thereto version (b) would have required a CFC-inclusion for non-genuine arrangements only.
The general concept of the draft Austrian CFC-Regime is, therefore, the inclusion of income in the Austrian tax base of an Austrian corporate shareholder that holds directly or indirectly a controlling participation in a foreign entity if that entity generates low taxed passive income. (Note: the CFC rules also apply to permanent establishments the income of which is generally exempt from taxation in Austria; such rule, however, is not relevant in the given context).
The CFC-Regime shall be introduced into the Austrian Corporate Income Tax Act (“CITA”) as new § 10a CITA.
2. Inclusion of "Passive Income" (Hinzurechnungsbesteuerung)
The following list defines what kind of passive income of a controlled foreign company has to be included in the tax base of the Austrian parent:
(i) interest or any other income generated by financial assets;
(ii) royalties or any other income generated from intellectual property;
(iii) dividends and income from the disposal of shares;
(iv) income from financial leasing;
(v) income from insurance, banking, and other financial activities;
(vi) income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value;
The striking difference between passive income as defined for purposes of the denial of the currently applicable participation exemption is that not only interest and royalties are covered by the definition of passive income for CFC purposes, but also “other income” from financial assets and from intellectual property (IP) which includes capital gains therefrom. Furthermore, also dividends and capital gains from the disposal of participations (or: shares) are generally included in the passive income definition, while dividends are considered neutral for purposes of the existing participation exemption and capital gains are only harmful if related to portfolio participations (generally below 10% holdings) that are not held as long-term investment. Finally, the last three categories of passive income (iv)-(vi) are new for a definition of passive income in Austrian tax law. In this context it is important to note that for banks and insurance groups a general exemption from the CFC-Regime is provided for.
3. Low Taxation
According to the draft CFC-Regime income is considered low taxed if the actual tax burden abroad does not exceed 12.5%. The respective income of the foreign company shall be calculated according to the relevant domestic provisions for corporations with unlimited tax liability and shall be compared to the actually paid foreign tax.
4. One Third Threshold
Besides the requirement of control (see next point), low taxed passive income shall only be taxed if it amounts to more than one-third of the income of the foreign company. Also for these purposes, the foreign income is determined according to Austrian tax law.
Control is fulfilled if an Austrian company (the controlling company) itself, or together with its associated companies, holds a direct or indirect participation of more than 50% of the voting rights, owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of a foreign company (controlled company).
An associated company (verbundenes Unternehmen) is either
- a corporation (Körperschaft) that owns a direct or indirect participation of more than 25% of the voting rights, owns directly or indirectly more than 25% of the capital, or is entitled to receive more than 25% of the profits of an (associated) company; or
- a legal or natural entity (eine juristische oder natürliche Person) or an association of individuals (Personenvereinigung) that owns a direct or indirect participation of more than 25% of the voting rights, owns directly or indirectly more than 25% of capital or is entitled to receive more than 25% of the profits of an (associated) company.
The controlling company might be a tax resident corporation or a non-resident subject to taxation in Austria (e.g., because of a permanent establishment). The controlled companies are foreign companies.
6. Cumulative Test
Passive income only has to be included in the tax base of the controlling parent if the following three requirements are cumulatively fulfilled:
(a) Low taxation;
(b) Control; and
(c) The controlled foreign company, considering its staff, equipment, assets and premises, does not pursue a substantive economic activity. The fact that the controlled foreign company carries out substantive economic activity must be proven by the controlling company (Substanznachweis).
This last requirement for an inclusion of passive income in the Austrian tax base of the controlling parent is crucial, since no inclusion applies if the foreign controlled company can show substance.
7. Inclusion and Distributions
If the requirements are fulfilled the retained income (calculated according to the Austrian Income Tax Act (“ITA”) and the CITA) of the controlled foreign company shall be attributed to the profit of the controlling company to the extent of its direct or indirect share in the foreign company.
The inclusion rule shall also apply to domestic companies having their place of management abroad and it also applies with respect to foreign permanent establishments if their income would generally be tax exempt in Austria, in case they generate passive income.
Upon distributions from controlled foreign companies Austrian taxes imposed because of the inclusion of income under the CFC-Regime have to be taken into account if the distributions are taxable in Austria.
8. Special Rules
While dividends are generally included in the definition of passive income, they are only treated as passive if they do not lead to a switch over from exemption to taxation with providing a tax credit under the participation exemption rules.
Furthermore, while income from insurance, banking and other financial activities is defined as passive income, an exemption is provided for undertakings that are formally regulated insurance, banking or other financial services provider.
9. Entering Into Force
According to the legislative draft, the new CFC-Regime shall apply with respect to financial years starting after 30 September 2018.
The concrete procedure on how the attribution and the switch-over rule shall be applied shall be defined in detail in a regulation to be issued by the Austrian Federal Minister of Finance.
The period of time during which comments and suggestions on the draft legislation might be submitted expires on 16 May 2018. Thereafter, a new draft from the government is to be expected that is submitted to the Austrian parliament (i.e. to the lower chamber, the National Council) for further processing.
C. The Amended and (Partially) New Participation Exemption
In the course of introducing the new Austrian CFC-Regime, modifications to the Austrian participation exemption are foreseen as well, in particular, the switch-over rule from exemption to taxation with credit (§ 10 (4) and (5) CITA) is amended in the context of holding participations below 10%.
The proposed changes abolish the rules currently applicable with respect to portfolio participations and foresee that, in addition to qualified participations in accordance with the Austrian international participation exemption, the switch-over rule from exemption to taxation with credit only applies to qualified portfolio participations, i.e. to participations with a minimum capital interest of 5%.
If amended as proposed, the new switch-over rule will apply to participations in foreign companies whose main business focus it is to derive low-taxed passive income, which is generally defined in accordance with the provisions for the new Austrian CFC-Regime. For the determination of such business focus, dividends received by the foreign company that would, from an Austrian perspective, be exempt from taxation according to § 10 CITA are not considered, what especially is relevant for participations in foreign holding companies. Further, no switch-over applies if the profits have previously been attributed according to the CFC-Regime outlined above.
D. Non-Deductibility of Certain Interest and Royalties Amended
§ 12 (1) (10) CITA provides for the non-deductibility of interest and royalty expenses paid to an affiliated recipient (beneficial owner), if such recipient is subject to no or a low tax rate. If such low taxation is the result of a tax refund or a tax reduction (including a tax refund to the shareholder(s) of the recipient) which is only available to the recipient, respectively its shareholder(s) in a subsequent year, the non-deductibility generally nevertheless applies in the year the expenses occur. Under the current provision, the taxpayer is, however, allowed to deduct such expenses subsequently, if within a review period of five years actually no use of such tax refunds or tax reductions has been made. The draft bill provides for a certain tightening of such rule and extents the current review period of five years to nine years.
E. Exit Taxation – Instalment Payment Period Restricted
§ 6 ITA currently states that if Austria’s taxation right is restricted vis-à-vis an EU/EEA member state (e.g., due to a transfer of assets or due to a reorganization), the resulting corporate income tax on the increases in value of the transferred assets (exit taxation) can be paid in instalments over a period of seven years for fixed assets (two years for current assets). All future instalments currently become immediately due if the respective assets, businesses or permanent establishments are (a) disposed of, (b) are withdrawn in any other manner or (c) are transferred into a third (non-EU/EEA) state.
By implementation of the ATAD, the draft bill shortens the payment period for the instalments from seven to five years. Furthermore, the obligation to immediately pay all outstanding instalments will, in addition to the cases already currently foreseen, be triggered if (d) a company’s registered seat or its place of management is transferred to outside the EU/EEA, (e) if the taxpayer declares insolvency or (f) if the taxpayer fails to fully pay an instalment at the latest within three months after its maturity.
F. Scope of Rulings Extended
The provisions in § 118 Federal Fiscal Code regarding advance rulings (i.e. binding decisions given by the tax authorities to a taxpayer’s concrete legal question for a future fact pattern) are currently limited to legal questions concerning corporate reorganizations, tax groups, and transfer pricing. The proposed draft seeks to extend the scope of the advance ruling procedure also to questions concerning international tax law, value added tax, and tax abuse.
G. General Anti-Avoidance Rule Amended
As regards the Austrian general anti-avoidance rule (“GAAR”, § 22 Federal Fiscal Code), the main amendment proposed by the draft bill is to introduce, for the first time, an explicit definition of “abuse” into Austrian tax law.
Under its proposed wording, abuse is defined as a legal arrangement (which may consist of one or multiple steps) or a series of legal arrangements that are unusual and non-genuine in light of the commercial objective. According to the proposed definition, arrangements are unusual and non-genuine if they only make sense when taking into account the related tax-saving effect, because the main purpose or one of the main purposes is to obtain a tax advantage that defeats the object or purpose of the applicable tax law. The definition then finally states that there is no abuse if valid commercial reasons exist which reflect economic reality.
According to the Austrian Ministry of Finance, the proposed wording of the definition shall, in particular, ensure that (a) the Austrian GAAR fully complies with Art. 6 ATAD, (b) the current scope of the Austrian GAAR is not restricted, (c) the current understanding and interpretation of the Austrian GAAR can, to the largest extent possible, be continued, and (d) only one single GAAR is needed under Austrian tax law (rather than, e.g., introducing a new GAAR in line with Art. 6 ATAD which would only apply to corporate taxation within the scope of the ATAD, while the existing GAAR would remain applicable for all other tax matters).
While such objectives can clearly be recognized in the proposed wording of the abuse-definition, as it combines the main aspects of Art. 6 ATAD with the main characteristics of the Austrian GAAR as currently interpreted by the Austrian Administrative Court and the Austrian tax authorities, it remains, in our view, uncertain how the new definition will indeed be interpreted in practice, especially due to the use of several currently unclear notions and concepts of Art. 6 ATAD. It will also be of particular interest how the future case law of the ECJ will influence the interpretation of the Austrian GAAR, especially in cases which are out of the scope of the ATAD.
The information provided in this newsletter is general in nature and does not constitute legal advice. BINDER GRÖSSWANG Rechtsanwälte GmbH cannot assume any liability in respect thereof. Before entering in commercial transactions, professional legal advice should be sought.