Austria

Austria: A Tasty Treat of Tax Incentives


By Erich Baier, MBA, LL.M. (Int’l Tax Law) TEP (01/12/2011)

Located at the cross roads between Eastern and Western Europe and right in the centre of the European Union, of which Austria is member of, Austria already for centuries has served as an ideal meeting point and a perfect hub for entrepreneurial activities both in the East and the West.

 

 

Not only its geographical location which is an ideal starting point for entrepreneurial activities as well as a safe and comfortable place for retiring and enjoying a good way of life made Austria a prominent place but also a large number of tax benefits both for individuals and corporations.

 

 

Below you can find an overview of which kind of sweeties, apart from its famous chocolate cake, Austria can offer.

 

 

The Austrian Holding Regime

 

Austrian corporate entities can obtain foreign source dividends and capital gains resulting from the sale of foreign shares tax exempt provided that at least 10 % of the foreign shares are held for at least one year.

 

No treaty is necessary to enable the Austrian company to receive this income tax exempt, even dividends from low tax or no tax countries are not taxed in the hands of the Austrian company, provided that:

  • the subsidiary is achieving active income, which includes rental income; and
  • the foreign subsidiary of the Austrian company is to exposed to at least 15 per cent in the case of passive income (interest income and royalties).

 

 

The year 2011 brought another improvement of this holding system, the so-called portfolio exemption.

 

 

This regulation foresees, that dividends received by an Austrian company which holds less than 10 per cent of the shares of a foreign subsidiary are tax exempt in the hands of the Austrian company provided that the foreign subsidiary is exposed to a tax bracket of more than 15 per cent. Then also the sale of these foreign shares is tax exempt. In case the foreign tax bracket is less than 15 per cent dividends and capital gains achieved by the Austrian company are taxable but a foreign tax credit is granted and the foreign corporate tax can be carried forward for an indefinite period of time.

 

 

Foreign source losses

 

Provided that such a foreign subsidiary of the Austrian company is suffering from losses these losses can be deducted from the tax base of the Austrian company. These losses have to be calculated according to Austrian accounting principles and the Austrian company has to hold more than 50 per cent of the shares of the foreign subsidiary and has to form a group with that foreign subsidiary whereby the foreign subsidiary has to stay group member for at least three years. The percentage of allocation of such losses to the Austrian parent company is equal the percentage of the shareholding in that foreign corporation.

 

 

In case of a domestic subsidiary being member of a group 100 per cent of the profits or losses from this domestic subsidiary are allocated to the Austrian parent company even if the Austrian parent company holds less than 100 per cent of the shares of its domestic subsidiary.

 

 

 

Foreign permanent establishments

 

Sometimes it makes more sense to use the form of a partnership or just to establish a foreign permanent establishment for one’s business. In such a case losses from the foreign permanent establishment or the foreign partnership are tax deductible from the domestic tax base of the Austrian company. Nevertheless profits from such foreign based permanent establishments or partnerships are tax exempt in Austria provided that there is a tax treaty existing with that foreign jurisdiction and Austria is applying the exemption method which is the case in more than 95 per cent of the tax treaties Austria has concluded with other jurisdictions.

 

 

If such profit shares of a foreign partnership come from a country with which Austria does not have a tax treaty these profits nevertheless can stay tax exempt in the hands of the Austrian company provided that the profits achieved in that foreign country are exposed to an overall tax burden of at least 15 per cent. Otherwise these profits are taxable in the hands of the Austrian parent company and a foreign tax credit is granted.

 

 

 

Austrian private foundation

 

Another very prominent Austrian corporate entity is the Austrian private foundation.

 

It is a corporate entity which has no shareholders and which comes into existence with the help of a notarial deed. Founder can be any resident or non-resident individual or juridical person. An Austrian private foundation can be established either revocable or irrevocable whereby only individuals can establish a revocable foundation.

 

 

The charter of the foundation includes only general regulations like the name of the foundation, the seat and the minimum capital which is €70.000.

 

 

The non-public by-laws govern regulations regarding the endowment of additional assets, who the beneficiaries are and when they get paid what.

 

 

The founder can reserve the right to amend the charter and the non-public by-laws at any time.

 

The Austrian foundation has access to all tax treaties Austria has concluded with other countries and foresees material tax exemptions in regard of capital investment income. It furthermore serves as a perfect tool to avoid inheritance tax and estate tax worldwide.

 

No inheritance tax, no gift tax

 

 

Another material benefit of the Austrian tax system is, that both inheritance tax and gift tax were abolished as per August 1, 2008. Taking into consideration that Austria also does not levy any net wealth tax Austria has become quite popular as a perfect place of residence for HNWI’s.

 

Research and Development Subsidies

 

 

Material research and development (R&D) activities are crucial for companies engaged in business in an international scale. Such activities of course require substantial financial means and Austria, being aware about the importance of such activities, has been supporting such companies in many ways, among others with subsidies.

 

 

But there is an additional tax incentive which is unique and that is, that the Austrian tax administration is granting a reimbursement of R&D expenses.

 

 

This reimbursement amounts to 10 per cent of the R&D expenses spent in a year.

 

The following example shall illustrate how beneficial this regulation is:

 

Revenues 6.000.000

R&D Expenses - 4.000.000

Tax Base 2.000.000

25% Tax 500.000

R&D premium (10% of 4m) - 400.000

Tax to be Paid 100.000

Effective Tax Bracket

(100.000 / 2.000.000) 5 %

 

 

 

As one can see a 10 per cent reimbursement of the R&D expenses spent leads to an effective tax bracket of just five per cent.

 

 

Together with the large tax treaty network Austria has with currently 89 jurisdictions and which is constantly growing builds a more than robust base for such entrepreneurial activities.

 

Considering the fact, that of course the EU Royalty Directive is applicable in Austria and noting that a large number of tax treaties Austria has concluded with other countries foresee a zero rate on in- and outgoing royalties it is quite understandable why a lot of international companies shift their research & development department to Austria.

 

Sports is good for your taxes!

 

 

Austria offers a more than unique and attractive tax regime for active sportsmen. This regime does not apply to artists, trainers or retired sportsmen.

 

 

 

To fall under this regime a sportsman has

 

  • to be due to unlimited tax liability in Austria
  • to be self-employed
  • to perform his activities primarily outside of Austria

 

If these conditions are met only 33 per cent of the worldwide income achieved by this sportsman is exposed to taxes in Austria. This includes all sport related income from eg merchandising or the marketing of image rights.

 

 

 

A sportsman achieving an annual income of €6m from his activities and the exploitation of his image rights would normally be due to a 50 per cent tax bracket in Austria, this would lead to a tax burden of €3m.

 

 

Applying this special regime means that only 33 per cent of €6m, ie €1.980.000, are exposed to 50 per cent tax which leads to a tax burden of €990.000. And this is an effective tax bracket of just 16.5 per cent.

 

 

But even this tax bracket can be reduced when combining this regulation with other regulations laid down in the Austrian Income Tax Act and the large tax treaty network Austria has with other countries.

 

Conclusion

 

 

Austria offers a lot of fine things. A marvellous and clean environment, literally hundreds of museums and theatres, the famous Viennese Opera House – and a marvellous tax system.

 

So please come in, sit down and enjoy a very tasty tax dish, prepared with all the ingredients just mentioned above. You will enjoy it.