Austria

The New Austrian Holding Regime: Now Better than Ever


By Erich Baier, MBA, LL.M (Int’l Tax Law), Certified Tax Advisor (04/02/2010)

Introduction

For more than 20 years, Austria has been one of the leading jurisdictions in regard of Holding Companies. Apart from tax aspects, which will be described below, the following criteria make Austria a perfect location for establishing a holding company:

  • member of the European Union (EU) since 1995;
  • various United Nations (UN) organisations have their headquarters in Vienna;
  • Austria is located right in the centre of Europe;
  • stable and growing economy;
  • unrivalled security and health care system; and
  • clean and healthy environment.

Apart from these facts, Austria offers the following tax benefits:

  • no net wealth tax;
  • no gift and inheritance tax (as from 1 August 2008);
  • extremely friendly tax climate;
  • large tax treaty network (more than 80 treaties);
  • written tax rulings can be obtained on a no-name basis;
  • large number of tax incentives both for corporations and individuals;
  • liberal, open-minded tax authorities with a high level of education; and
  • willingness to cooperate.

Austria is famous for its neutrality and its perfect relationships with its international partners. This is one of the reasons why Austria has a tax treaty network with more than 80 countries worldwide.

General Tax Regulations

It is a long-standing tradition that Austrian entrepreneurs and Austrian companies are free-thinking in their decisions on how to finance their businesses. The Austrian Supreme Court holds that it is up to an entrepreneur how to finance their business and it would violate constitutional law in Austria if that right was restricted. Therefore, Austrian tax law does not know any debt-equity ratios or thin-cap rules. Any interest payment is fully tax deductible regardless of whether it is paid to a domestic or foreign lender.

  • no withholding tax is withheld even if interest is paid to a lender in a non-treaty country
  • no CFC legislation

Dividends from foreign subsidiaries and capital gains from the sale of shares in such subsidiaries are tax exempt and there is no treaty necessary with the relevant country in which the subsidiary has its seat to obtain that income tax-free, even if the subsidiary is tax exempt according to local regulations or if the subsidiary has its seat in an off-shore jurisdiction.

Any Austrian corporate entity, such as a GmbH (company with limited liability) or an AG (stock corporation), can obtain tax exempt dividends and tax exempt capital gains. There is no need for a special purpose vehicle. Losses of foreign subsidiaries, calculated according to Austrian rules, are deductible from the Austrian parent’s tax base.

KEY FEATURES OF THE AUSTRIAN HOLDING COMPANY

Domestic Holdings

In Austria, inter-company dividends are tax exempt in the hands of the receiving company. There is no minimum shareholding requirement and there is no holding period required to obtain such dividends tax exempt. Capital gains resulting from the sale of shares in a domestic corporation, achieved by another corporation, are taxable and are exposed to the statutory flat corporate tax rate of 25 per cent. Provided that the acquisition of the shares of the underlying subsidiary was leveraged, any interest either paid or accrued until such capital gains were achieved are deductible from such a capital gain.

Foreign Holdings

To obtain tax exempt dividends and tax exempt capital gains from international participations, a minimum shareholding of 10 per cent and a minimum holding period of one year is required. Provided that these conditions are met the Austrian Holding Company can obtain tax-free dividends and tax-free capital gains regardless of whether Austria has a treaty with that foreign country or not.

 

 

Indirect Holdings

According to Austrian law, indirect participations via partnerships lead to tax exempt income for the Austrian holding company.

Hybrid Structures

It is also possible to use Austrian corporations for hybrid structures. The tax exemption for income does not only include dividends and capital gains, but also any type of profit-related income an Austrian corporation achieves from either domestic or foreign source income. If an Austrian company does not have a direct shareholding in a foreign entity but grants a loan to that foreign entity, the interest paid to the Austrian company is tax exempt and seen as a kind of dividend income, provided that the interest is profit-related and that the Austrian company is entitled to participate in the liquidation proceeds of the foreign entity. That does not mean that there will be liquidation proceeds, but that the corporation has to have the right to participate. Even if the foreign entity deducts these payments made to the Austrian corporation from its own tax base, these payments stay tax-free in the hands of the Austrian company.

Ruling

Such a hybrid structure can be implemented, as can other such cases, with the help of the Austrian tax authorities from which written rulings can be obtained.

Dual Resident Companies

These companies have access to the Austrian holding system provided that the management of the foreign parent company is in Austria.

Obtaining Royalty Income via Austrian Companies

Austrian companies are quite often used to obtain royalty income from foreign sources. Among Austria’s large number of tax treaties, 34 provide for a zero withholding tax rate levied upon royalty payments to or from Austrian companies, including the UK and the US. For many more, the withholding tax rate is significantly reduced and is in most cases between five and 10 per cent. By using domestic regulations laid down in Austrian tax law, royalty income routed via an Austrian company can lead to a profit exposed to a tax bracket of only four to eight per cent.

Foreign Subsidiary Achieves Passive Income

The scope of passive income is very narrow according to Austrian regulations. For Austrian tax purposes, a foreign subsidiary achieves passive income only if it achieves the following income:

  • income;
  • royalty income;
  • capital gains resulting from the sale of less than 10 per cent shareholdings in other corporations.

Rental income achieved by a foreign subsidiary is always seen as active income. Trading assets or securities is considered active income for Austrian tax purposes.

Tax Consequences in Case of Passive Income

Provided that the subsidiary achieves passive income and the overall tax burden of the subsidiary is not more than 15 per cent, any dividends distributed by the foreign subsidiary or any capital gains resulting from the sale of shares of such a foreign subsidiary are taxable in the hands of the Austrian company. Provided that the foreign subsidiary achieves passive income and the overall tax burden of the foreign subsidiary is not more than 15 per cent, there will be no CFC legislation. The mere holding of such subsidiaries does not trigger any taxes in Austria.

New Improvements in the Austrian Holding Regime

Contrary to the regulations applicable to domestic holdings, foreign holdings require a minimum of 10 per cent shareholding for a period of at least one year to obtain tax-exempt foreign source dividends and capital gains. Austria just recently amended the Austrian Corporate Income Tax Act so that shareholdings of less than 10 per cent in companies which have their seat within the EU or the European Economic Area (EEA) lead to tax exempt dividends whereby certain conditions, as laid down below, have to be met.

Active business / Local tax 15 per cent or more

Provided that the subsidiary with its seat within the EU/EEA is conducting an active business and the local tax is 15 per cent or more, dividends received from such a subsidiary are tax exempt in the hands of the Austrian company, whereby no minimum shareholding is required. Provided that the shareholding in such a subsidiary within the EU/EEA is less than 10 per cent, capital gains resulting from the sale of the shares are taxable but a foreign tax credit will be granted; if its shareholding is 10 per cent or more, the capital gains are tax exempt.

Active business / Local tax less than 15 per cent

The dividends received from a subsidiary with its seat within the EU/EEA will be taxable and a foreign tax credit will be granted. Capital gains will be tax exempt if the shareholding is 10 per cent or more.

No More Withholding Tax on Outgoing Dividends

The new regulations which came into force also foresee that a corporate shareholder with its seat within the EU/EEA can file for reimbursement of withholding tax levied upon dividends from Austrian sources which could not be credited totally or partially against domestic income taxes in the country of residence of the corporate shareholder provided that the tax treaty Austria has with the relevant country includes a clause foreseeing comprehensive administrative cooperation and support in enforcement. The taxpayer has to give written proof that the Austrian withholding tax was not credited against the domestic tax. Such proof can include, inter alia, a copy of the tax assessment note.

Group Taxation

Apart from these magnificent conditions for Holding Companies in Austria, Austrian tax law offers the world’s best Group Taxation System. This group taxation system enables Austrian companies to offset not only losses which were suffered by their domestic subsidiaries from its own tax base, but losses of their foreign subsidiaries. This tax tool leads to material tax savings and unrivalled tax planning opportunities. The conditions for applying this Group Taxation System are:

  • a shareholding of more than 50 per cent in the (domestic or foreign) subsidiary;
  • a majority of voting rights; and
  • the group member has to stay within the group for at least three years.

The Austrian parent company which wants to integrate its subsidiaries into a group has to file a petition for group taxation with the competent tax authority, which is purely a formal act.

What are the consequences of forming a group?

No more taxes at the level of domestic subsidiaries. In regard to domestic subsidiaries integrated into a group, no more taxes are levied upon the income of the subsidiary. Profits achieved by a domestic group member are allocated to the parent company which then has to include the profit of the subsidiary into its own tax base. Losses suffered by the domestic subsidiary can be offset from the tax base of the group parent company.

In the case of domestic subsidiaries integrated into a group, 100 per cent of the profit or loss of the subsidiary is allocated to the parent company, irrespective of the percentage of shareholding the parent company has in its subsidiary.

Example 1

Company A holds 52 per cent in a domestic subsidiary, but 100 per cent of all profits or losses are allocated to the group parent. In case of foreign group members suffering from a loss, only the percentage equivalent to the shareholding in that foreign subsidiary is allocated to the group parent in Austria for tax purposes.

Example 2

Company A holds 52 per cent in a foreign subsidiary, therefore 52 per cent of the losses can be set off from the Austrian tax base. Profits achieved by the foreign subsidiary are tax exempt in Austria.

Amortisation of Acquired Shares of a Group Member

50 per cent of the acquisition price of the shares paid for a domestic subsidiary can be amortised over a period of 15 years and is fully tax deductible for the Austrian parent company. This fantastic regulation laid down in the Austrian Corporate Income Tax Act now makes a share deal equal to an asset deal and leads to almost unlimited tax saving possibilities.

Summary of the Austrian Holding System

  • domestic dividends: tax exempt
  • domestic capital gains: taxable (25  per cent)
  • foreign dividends and foreign capital gains: tax exempt (10 per cent holding for at least one year)
  • no tax treaty required: dividends from foreign corporations and capital gains resulting from the sale of shares in such foreign corporations are tax exempt, regardless of whether a treaty with this country is existing or not.
  • no CFC legislation: only dividends received from foreign companies earning interest income or royalties are taxable, as are capital gains resulting from the sale of shares in such companies. The mere holding of shares in such companies does not trigger taxes. Any other dividends or capital gains, even from offshore companies, are tax exempt;
  • no debt-equity rules: interest fully deductible, even if effectively connected with tax exempt income;
  • no withholding tax on interest paid to foreign lenders (e.g. offshore company)
  • notional interest deduction: for a foreign shareholder’s loan, notional interest can be deducted for tax purposes thereby reducing the tax base;
  • losses of foreign subsidiaries tax deductible in Austria (Group taxation): losses of a foreign subsidiary can be offset from the tax base of the Austrian parent company (condition: shareholding of more than 50 per cent in the foreign subsidiary);
  • “Check-the-box” system: Austrian parent companies can decide for each holding in a foreign subsidiary whether capital gains resulting from the sale of such shareholdings shall be tax exempt (as foreseen by law) or be taxable; and
  • dual-resident companies can use the Austrian holding system.

Conclusion

The extreme tax benefits and the very liberal approach of the Austrian tax administration, together with a large treaty network, makes an Austrian Holding a perfect tool for holding shares in domestic and foreign corporations. The lure of offshore income tax-free, optimal international financing structures, royalty income with an average tax burden of less than eight per cent and the utilisation of foreign source losses to compensate other taxable income and to avoid capital gains tax should prove very attractive to the astute investor.