Austria, at the gateway between east and west, is a perfect place to make tax-efficient investments into foreign countries. You do not need to be a special purpose company to reap the benefits of the Austrian holding tax regime. Any Austrian corporate entity, such as a GmbH (company with limited liability), an AG (stock corporation), or Austrian permanent establishments of European corporate entities, can benefit from the Austrian holding privilege.
What are the key features of the Austrian holding regime
Intercompany dividends paid between two Austrian companies are tax-exempt for the receiver. Capital gains from the sale of shares in an Austrian company held by another Austrian company are taxable and are subject to the standard flat rate corporate tax of 25 per cent. Financing costs effectively connected with the acquisition of the shares held are fully tax-deductible.
Provided that the Austrian company holds at least 10 per cent of the shares of a foreign corporate entity, comparable to an Austrian GmbH, for at least one year, any dividends received by the Austrian company, and any capital gains resulting from the sale of the shares of the foreign company, are tax-exempt in Austria.
This applies regardless of whether Austria has a treaty with that country or not.
Austria does not apply any controlled foreign company (CFC) legislation, thin capitalisation rules, or debt equity ratios so that Austrian companies can leverage the acquisition of foreign shareholdings. Interest is fully tax-deductible and can compensate any other income achieved by the Austrian company.
There is no withholding tax on interest paid to foreign lenders.
The Austrian ‘Tick the Box’ System
An Austrian company can make capital gains taxable if it wishes to do so. The Austrian company just has to ‘tick the box’ in its tax return and can select whether or not an capital gains resulting from a sale should be taxable. Nevertheless, dividends received stay tax-exempt.
The Foreign Subsidiary
Austrian law does not recognise CFC legislation or similar regulations. It is, however, important to know how income achieved by a foreign subsidiary impacts on the tax situation of the Austrian parent company.
Provided that the Austrian company holds shares in a foreign entity that achieves passive income, the sale of such a participation and the dividends paid to the Austrian company will be taxable. The mere holding of such companies does not have any tax impact.
What is seen as passive income?The Foreign Subsidiary
The Austrian tax authorities categorise income as passive if the following income is achieved by the foreign subsidiary and, at the same time, the overall tax burden of this subsidiary is not more than 15 per cent.
Dividends are tax-exempt if resulting from rental income (considered to be active income).
Dividends are tax-exempt even if the foreign subsidiary is not subject to taxes.
The Foreign Subsidiary is Making Losses
Due to the new group taxation system, losses suffered by foreign subsidiaries can be offset against the domestic tax base of the Austrian company holding shares in such a subsidiary, provided that the Austrian company holds more than 50 per cent of the shares of the foreign subsidiary. These foreign losses must be calculated according to Austrian regulations and have to be recaptured in the hands of the Austrian company, when the foreign entity is using these losses as a loss carry forward to compensate its own tax burden.
Nevertheless, although losses from the foreign subsidiary can be set off from the tax base of the Austrian parent, dividends paid by the foreign entity are tax-exempt.
These dividends from foreign entities are tax-exempt even if the foreign entity is not subject to taxes.
According to Austrian law, indirect participations via partnerships lead to tax-exempt income for the Austrian holding company, as the following graphic shows: