Niklas Schmidt and Eva Stadler of Wolf Theiss Attorneys at Law explain the commercial and tax benefits for companies looking to incorporate in Austria.
Austria is an attractive location for holding companies. The following factors may be mentioned in this context: (i) while Austria has a nominal corporate income tax rate of 25 per cent, many exemptions apply that are particularly relevant for holding companies; (ii) Austria has a comprehensive network of double taxation treaties with more than 80 countries, the majority of which do not contain specific anti-abuse rules; (iii) Austria is a member state of the European Union and has implemented all directives relating to direct taxation, in particular the EC Parent/Subsidiary Directive, the EC Merger Directive and the EC Interest and Royalties Directive; (iv) Austria has not implemented CFC-style legislation; (v) Austria has no formal thin-capitalisation rules; (vi) most types of restructurings of Austrian companies (eg, mergers, demergers and contributions of qualifying assets) can be effected in a tax-free manner; and (vii) taxpayers may obtain tax rulings confirming the tax treatment of a specific situation in advance.
Austrian commercial and tax law do not know the concept of a holding company as such; that is to say neither does commercial law provide for a specific legal form for holding companies, nor does tax law contain a special regime that applies to such.
The choice of form for an Austrian holding company depends on the respective advantages and disadvantages offered by the different types of companies. Currently, the limited liability company (GmbH) is the form most widely used for holding companies due to its uncomplicated and inexpensive formation and corporate governance.
The GmbH is an independent legal entity that may be established for any legal purpose, including the holding of subsidiaries. It acts in its own name and is liable for its obligations. Its shareholders have only limited liability.
The formation of a GmbH basically requires the execution of the articles of association by one or more persons before a notary public. The prospective shareholders may be represented by persons acting through powers of attorney. The minimum share capital for an Austrian GmbH is Ä35,000, at least half of which must be paid in to an account with an Austrian bank. When all statutory requirements have been fulfilled, the court orders the company to be registered in the commercial register, at which point in time it comes into full legal existence. Usually, the registration takes about one week.
Instead of setting up a new company, ready-made and registered companies without any previous operations may be acquired. Most large law firms and service providers in Austria render this type of service.
A company having its place of effective management or its legal seat in Austria is subject to unlimited corporate income tax liability in Austria on its worldwide income at a rate of 25 per cent. Austria does not levy a trade tax or surcharge on a company’s income. Please note that there exist several tax exemptions that are relevant for holding companies and which will be described in the following sections.
National participation exemption
Pursuant to the national participation exemption, dividends received by an Austrian corporation from another are tax exempt regardless of the holding period or the participation level (cf. section 10(1)(1) of the Austrian Corporate Income Tax Act).
International qualified participation exemption
Pursuant to the international qualified participation exemption, dividends and capital gains earned by an Austrian corporation from a non-Austrian corporation are tax exempt if the following conditions are met (cf. section 10(1)(7) in connection with section (10)(2) of the Austrian Corporate Income Tax Act): the participation must amount to at least 10 per cent of the stated share capital of the foreign subsidiary; the participation must have been held for a minimum duration of one year; and the participation must be in a foreign subsidiary having one of the legal forms listed in the annex to the EC Parent/Subsidiary Directive or being legally comparable to an Austrian corporation.
It should be noted that in case of participations falling under the international qualified participation exemption, not only capital gains are tax exempt, but also capital losses and other positive and negative changes in value are deemed tax neutral. It is, however, possible to opt for the taxability of a specific participation in the corporate income tax return filed for the year of such participation’s acquisition. In this case, capital gains and write-ups would be taxable, whereas capital losses and write-downs would be tax-deductible.
Since Austria has no CFC legislation, in certain cases, where there are reasons to suspect tax avoidance, the international participation exemption is replaced by an indirect tax credit system. If this switch-over clause is triggered, then dividends as well as capital gains from foreign subsidiaries are subject to the standard corporate income tax rate of 25 per cent (rather than being tax-exempt), with a tax credit for the underlying foreign taxes, if any, being granted in case of dividends. Such switch-over clause applies if both of the following two criteria are fulfilled or if one of the following two criteria is “strongly” fulfilled and the other is “nearly” fulfilled: (i) the foreign subsidiary predominantly focuses on earning, directly or indirectly, interest income, income from the letting of moveable tangible or intangible assets or income from the sale of participations; and (ii) the foreign subsidiary’s income is not subject to foreign tax comparable to the Austrian corporate income tax in respect of the calculation of the taxable basis or in respect of the tax rates.
International Portfolio Participation Exemption
Pursuant to the international portfolio participation exemption, dividends received by an Austrian corporation from a non-Austrian corporation, which do not fall under the international qualified participation exemption mentioned above, are tax exempt, regardless of the participation level or the holding period, if the following conditions are met (cf. section 10(1)(5) and 10(1)(6) of the Austrian Corporate Income Tax Act): the foreign subsidiary has one of the legal forms listed in the annex to the EC Parent/Subsidiary Directive; or the foreign subsidiary is legally comparable to an Austrian corporation and has its seat in a state with which Austria has agreed to the comprehensive exchange of information.
In the case of participations covered by the international portfolio participation exemption, a switch-over (taxability of dividends with credit for underlying taxes) applies if one of the following criteria is fulfilled: (i) the foreign subsidiary is not subject to a corporate income tax in its country of residence that is comparable to the Austrian corporate income tax; (ii) the foreign subsidiary is subject to a corporate income tax that is comparable to the Austrian corporate income tax, but its rate is less than 15 per cent; or (iii) the foreign corporation is subject to a comprehensive exemption from taxation in its country of residence.
Austria offers a very interesting group taxation regime, which includes cross-border loss relief: Pursuant to section 9 of the Austrian Corporate Income Tax Act, affiliated companies may jointly file a group taxation application with the tax authorities in order to establish a tax group. Affiliated companies are companies that are connected through a direct or indirect participation of more than 50 per cent of the nominal capital and voting rights. Such participation must exist throughout the entire fiscal year of the member of the tax group.
The top-tier company in a tax group will usually be a company with its legal seat and its place of management in Austria. Members of a tax group may be Austrian resident companies as well as non-resident companies. Whether the companies in a group earn active or passive income is irrelevant. Thus, pure holding companies are not precluded from participating in a tax group.
The formation of a tax group results in the taxable income of the group members being attributed to the top-tier company in the tax group. The incomes of the various group members are calculated separately and then attributed to such top-tier company. Thus, unlike in consolidation processes, income resulting from intra-group transactions is not eliminated for the purpose of calculating group income. Furthermore, it is important to note that setting up a tax group in no way affects the profits of the companies involved under financial accounting rules.
Finally, it should be noted that the establishment of an Austrian tax group offers the possibility to amortise and subsequently deduct for tax purposes goodwill acquired in the acquisition of the shares in an Austrian company by a group member.
Pursuant to section 11(1)(4) of the Austrian Corporate Income Tax Act, interest costs incurred in connection with the acquisition of participations falling under the national participation exemption, the international qualified participation exemption and the international portfolio participation exemption may be fully deducted from the tax base.
There are no statutory thin-capitalisation rules in Austria. However, the Austrian Administrative Court has established certain broad guidelines that are used to determine whether the equity funding at hand is adequate for the purpose of taxation. In practice, debt or equity ratios of 4:1 are not uncommon.
The only other restriction regarding interest deductibility is that interest costs incurred in connection with the acquisition of shares that were, directly or indirectly, purchased from a group company or from a controlling shareholder are not deductible.
Dividends distributed by an Austrian GmbH are generally subject to the deduction of 25 per cent withholding tax (except if dividends constitute the repayment of capital – whether resulting from a formal capital reduction or from the distribution of capital reserves).
In the case of non-resident shareholders, the withholding tax has the effect of final taxation.
In those cases where a double taxation treaty provides for a lower rate, the distributing company may, pursuant to the treaty, apply the standard rate of 25 per cent with the recipient shareholder having the possibility to reclaim the excess amount or directly apply the lower tax treaty rate (relief at source).
In addition, under the Austrian provisions implementing the EC Parent/Subsidiary Directive outbound dividends are totally exempt from any withholding tax insofar as the following conditions are satisfied (cf. section 94(2) of the Austrian Income Tax Act;): (i) a foreign company having one of the legal forms listed in the annex to the EC Parent/Subsidiary Directive; (ii) has held a participation of at least 10 per cent of the stated share capital of an Austrian corporation; (iii) for an uninterrupted holding period of at least one year; and (iv) no abuse of law exists.
In summary, it may be said that Austria as a jurisdiction offers some quite interesting features for holding companies.