Austria introduces anti-avoidance rule targeting hybrid cross-border structures

By implementing the provisions of the EC Anti-BEPS-Directive, Austria will introduce anti-avoidance rules targeting hybrid structures as of 1 January 2020.

According to a recently publihsed draft bill, these new rules aim at neutralizing any tax effects realized by implementing a hybrid cross-border structure. The main aspects of these new provisions (which are in detail rather complex) can be summarized as follows.

Targeted tax effects

In general, the new rules target the following two categories of tax effects realized by hybrid structures:

• deduction/no inclusion type comprising specific structures leading to a tax deduction in one state without any corresponding taxable income in the other state
• double deduction type comprising structures enabling a double tax deduction in two different states.

Based on the concept of the EC Anti Tax Avoidance Directive, it is usually the residence state of the payor which shall implement tax neutralization rules. Accordingly, in the case of Austria as the payor’s residence state, expenses without a corresponding taxable income in the state of the recipient will in general no longer be tax-deductible. In addition, for double deduction scenarios, Austria will generally speaking not recognize tax-deductible expenses in case of Austria being the resident state of the investor. 

Targeted structures

It should be noted that according to the draft bill these anti-avoidance mechanisms suggested by the new rules will only apply to specific structures as defined in the law. These structures having their grounds in deviating local law generally comprise group or otherwise related entities. Nevertheless, also structures between two unrelated parties (e.g. structures set up between a corporation and a bank) may fall within the scope of the new regime. This holds especially true if a tax advantage (as described above) is effectively taken into account upon determining the terms of the structure or alternatively, the implementation of the structure was pursued with the intention of realizing a tax effect. 

Examples for structures targeted by the new rules are hybrid financial instruments, different income allocation from financial instruments, hybrid entities, different allocation of expenses/revenues to a PE, different views on the qualification of a business operation as a PE as well as local law provisions enabling a dual deduction of expenses, such as e.g. group taxation regimes, in two different states.

One additional aspect of the rather complex new regime proposed by the draft bill is worth mentioning and concerns the potential re-qualification of a generally tax-transparent Austrian partnership into a separate taxable entity. Such re-qualification may occur in scenarios where foreign group companies hold a share in the Austrian partnership with the latter being regarded as a separate taxable entity in the state of residence of the foreign 
partners. In case of payments between the partners and the partnership, such structure generally results in the payments received by the partnership neither being taxed in Austria nor in the residence state of the partners combined with a tax-deduction for the payment on the side of the partners. To avoid these tax effects, the Austrian partnership shall be treated as a separate taxable entity in Austria to the extent of payments received by the partnership which are not being taxed elsewhere. 

Recommended To Dos

Considering the rather complex regime proposed to be introduced by the draft tax bill as of the beginning of 2020 we strongly recommend any Austrian entities to scrutinize their foreign structures, involving in particular financial instruments, hybrid entities or PE structures, from a perspective of the new rules.