Existing Regime
Proposed Amendments

The Austrian Ministry of Finance has been considering amending the participation exemption since the Primarolo Group labelled it a harmful tax measure and listed it in its 1999 report.

Existing Regime

Currently, dividends received by an Austrian resident company from (i) a company listed in Article 2 of the Parent Subsidiary Directive, or (ii) any non-resident company that is comparable to an Austrian limited liability company or joint stock company, are exempt from corporate income tax at Austrian corporate shareholder level.

The exemption is subject to a number of requirements, including a two-year holding period and 25% direct participation in the capital of the non-resident company. Capital gains derived from the alienation of such qualifying participations are also exempt from taxation (although capital losses are deductible).

Proposed Amendments

The ministry is considering (i) excluding capital gains from the international participation exemption, and (ii) changing the anti-abuse rule in respect of the international participation exemption.

Excluding capital gains
In future, capital gains will be fully taxable in the hands of the resident shareholder, and interest paid in respect of qualifying participations would generally become deductible when capital gains are realized.

Changing anti-abuse rule
The international participation exemption is currently replaced by an indirect foreign tax credit if:

  • the foreign subsidiary focuses on deriving passive income (ie, capital gains, royalties and rental income);
  • the effective tax burden on the foreign subsidiary's income is less than 15%; and
  • the ultimate shareholders are mostly Austrian residents.

The ministry plans to abolish the rule according to which no abuse is assumed if most of the (direct and indirect) shareholders are not Austrian residents. Thus, dividends received from subsidiaries registered in low tax jurisdictions would be exempt only if such entities primarily engage in an active trade or business.


The proposed amendments are likely to be disadvantageous to Austria as a holding location. Under the transitional rule, the applicability of the amendments is dependent on the holding company's registration (eg, for companies registered with the commercial register before January 1 2001 the amendments would take effect on January 1 2006). The 'grandfather clause' shall afford non-resident multinational groups with Austrian holding companies the opportunity of restructuring their cross-border operations.

For further information on these topics, please contact Reinhard Leitner or Gerald Gahleitner at Leitner & Leitner by telephone (+43 7327 0930) or by fax (+43 732 7093 303) or by email ([email protected] or [email protected]).