The recently resolved 2018 annual tax reform introduces a number of tax changes which are of significant relevance, in particular for internationally active corporations. One of the immanent aims of this reform is stemming cross-border tax avoidance schemes, accompanied by the implementation of the standards set by the EU Anti-Tax Avoidance Directive. In addition, the tax reform provides for facilitation as well as improvements from a procedural tax perspective. The following is a brief summary of the main changes relevant to corporations.
The most significant change introduced by the 2018 annual tax reform is the introduction of CFC rules for 'controlled foreign companies' into Austrian corporate income tax law.
Currently, dividends distributed by mainly passive income-earning low-taxed non-Austrian subsidiaries are part of the taxable income of the Austrian parent company and thus subject to Austrian corporate income tax with a tax credit for any foreign taxes actually paid. Pursuant to the new law, this switch-over mechanism is replaced by a CFC system with the income of a foreign passive income-earning low-taxed subsidiary being added to the tax base of the Austrian parent, irrespective of any actual distributions. As a result, the foreign subsidiary loses its shielding effect from a tax perspective.
By adding the foreign subsidiary’s income to the Austrian parent’s tax basis, the Austrian corporate income tax burden will be increased. Any future dividends distributed by the foreign subsidiary should be tax-free to the extent that these profits have already been subject to Austrian corporate income tax in previous years in the course of applying the CFC rules.
The CFC rules will – contrary to current legislation – be triggered where the Austrian corporation is in a controlling position with respect to the foreign subsidiary, thereby encompassing numerous group scenarios. A controlling position is generally assumed if the controlling entity directly or indirectly (together with its related entities):
The scope of the CFC legislation is considerably enlarged by considering also related entities (which are generally assumed as such where there is a participation of at least 25% of the voting rights or of the capital or a participation of at least 25% in the entity’s profit).
The CFC rules will be triggered in the case of a low-taxed passive income foreign subsidiary with insufficient substance (in the sense of lacking significant economic activities). Presenting evidence of the foreign entity’s substance will avoid the application of the CFC rules, irrespective of the entity achieving low-taxed passive income.
A passive income earning entity is assumed if the scope of detrimental passive activities sustainably exceed one third of the entire income of the foreign entity. It has to be highlighted that – compared to the current legislation – the scope of passive activities will be significantly enlarged under the new rules. In specific cases, dividends and capital gains, as well as the activities of insurance companies and banks generally, will also be included. The latter in particular targets foreign insurance and banking subsidiaries, such as group financial vehicles. These entities will only be exempt from the CFC rules if the scope of intra-group insurance or bank activities is less than one third of the entire passive income of the foreign entity.
The other criterion, ie the low taxation, is triggered if the effective tax rate in the foreign entity’s residence state does not exceed 12.5%, calculated from a tax basis as determined upon applying Austrian tax rules.
A potential double taxation triggered by the CFC rules will be avoided by providing for a tax credit for actually paid foreign taxes. Additionally, an (otherwise taxable) capital gain will be reduced by the amount of profits (forming part of such capital gain) which have already been subject to Austrian tax by virtue of the CFC legislation.
The CFC rules will also be relevant for passive income-earning low-taxed foreign PEs of an Austrian corporation. The CFC rules will apply irrespective of whether the underlying tax treaty provides for the exemption method for the profits of the PE, which effectively constitutes a treaty override (ie suspending the tax treaty provision by implementing a domestic rule).
Foreign corporations with neither their seat nor their place of management in Austria will only be targeted by the CFC rules to the extent that they hold participations in foreign entities (earning low-taxed passive income) which are attributable to an Austrian PE. Contrary to the currently prevailing rules, the CFC rules as well as the tax-exemption for eligible participations will apply irrespective of whether the foreign corporation is resident within the EU, the EEA or a third country.
An Austrian private foundation holding shares in a foreign entity earning low-taxed passive income will be within the scope of the new CFC rules.
As a result of the introduction of the CFC rules, the switch-over mechanism for portfolio participations – which only targets low-taxed foreign subsidiaries – will be completely removed.
By contrast, the scope of the switch-over mechanism rule for eligible international participations will be extended to portfolio participations of at least 5%. Such switch-over mechanism will be triggered if:
If these criteria are met, dividends will not be tax-exempt at the level of the Austrian parent, but will instead be subject to Austrian corporate income tax with a tax credit for any foreign taxes actually paid. In the case of qualifying international participations, capital gains and losses or any other changes in value of these participations will be exempt from tax neutrality.
The 2018 annual tax reform clarifies that the non-deductibility of interest expenses on debt capital raised for the acquisition of shares from a group company applies irrespective of whether the income from the participation acquired leads to tax-exempt or taxable income. This equally applies to the non-deductibility or allocation of depreciation expenses on participations. Only the non-deductibility of depreciations having their reasoning in previous distributions is restricted to participations leading to tax-exempt dividend income.
The new CFC rules come into force for fiscal years starting after 31 December 2018, thus targeting fiscal years starting 1 January 2019 onwards.
Internationally active corporations with foreign group companies or PEs earning passive income are therefore strongly advised to scrutinise existing structures and consider appropriate reorganisations in case the CFC rules may become relevant.
Currently it is possible to apply to defer payment of any exit tax triggered in the case of an exit scenario with a period of seven years being applicable for fixed assets. The 2018 annual tax reform shortens this period to five years.
Additionally, the following scenarios will lead to an immediate due date for any outstanding instalments by:
The shortening of the instalment period as well as the extension of the above described scenarios will entirely enter into force for any exit tax scenarios being realised as of 1 January 2019 onwards.
These changes also apply to any exit tax scenarios realised in the course of reorganisations with a reorganisation date after 31 December 2018.
The procedure necessary for a refund of Austrian withholding taxes (capital withholding tax, wage withholding tax or withholding tax on specific cross-border scenarios) will be facilitated for non-Austrian resident taxpayers. As a first step, an electronic pre-registration has to be submitted. The application for the refund will subsequently have to be signed and submitted with a delivery confirmation as well as a certificate of residency of the foreign tax office.
The broadening of the application of 'advance tax rulings' (ie the pre-clarification of tax treatment of certain issues) is highly appreciated. In addition to questions regarding reorganisations, tax groups and transfer pricing, which can already now be clarified by way of advance tax ruling, aspects of international tax law, VAT law, as well as a potential application of the abuse of law doctrine will be admitted to advance tax ruling as of 2019 (2020 for VAT related queries). Simultaneously the law provides for a period of two months in the course of which these queries shall be answered by the tax authority (this can be extended in case of a complex fact pattern).
As a positive remark, the 2018 annual tax reform introduces an accompanying monitoring process of the taxpayer as an alternative to a typical tax audit. Such possibility is available to taxpayers exceeding specific turnover thresholds. The aim of such process is to provide adequate planning as well as legal certainty to the taxpayer, as in case of an accompanying monitoring process a tax audit may only be possible in particular circumstances.
A prerequisite for participation in an accompanying monitoring process is the introduction of an internal tax control system which has been scrutinised by an Austrian tax adviser and which ensures the application of Austrian tax rules. The accompanying monitoring process can be initiated for the entire group of companies by way of application, leading to an increased disclosure obligation on the taxpayer as well as to an increase in the duty of the tax authority to provide information.
The 2018 annual tax reform explicitly clarifies that a mere indirect transfer of shares in a real estate owning entity will not trigger Austrian real estate transfer tax.