Corporate Income Taxation
Anti-avoidance Regulations
Reorganization of Enterprises
Capital Transfer Tax

Corporate Income Taxation

Taxable persons
Under Austrian tax law, the following corporate entities are regarded as non-transparent and are therefore subject to corporate income tax:

  • legal entities under private law (eg, public limited companies and private limited companies);
  • commercial enterprises operated by public utilities; and
  • associations, institutions and foundations without legal personality or accumulations of property for a specific purpose.

This Overview is restricted to public and private limited companies, since they are the most important corporate entities for the purposes of daily business in Austria.

Resident and non-resident taxation
Corporations having either their place of management or their legal seat in Austria are subject to unlimited corporate taxation ('resident taxation'). In such cases their worldwide income (ie, income from domestic and foreign sources) is taxable in Austria. To avoid double taxation of income from foreign sources, the provisions of the Austrian double tax treaties must be applied.

Corporate entities that do not have a domestic place of management or legal seat in Austria are subject to limited corporate income tax liability ('non-resident taxation'). They are subject to tax only on certain types of income derived from Austrian sources.

Taxable income
The taxable base for corporate income tax is the profit as determined in financial statements. Any profit derived by a corporation is subject to corporate income tax at a rate of 34%, regardless of whether it is distributed to shareholders.

Each corporation that is subject to resident taxation must effect quarterly corporate income tax advance payments which are calculated on the basis of the tax burden determined in the previous tax assessment. The payment is credited against the final corporate income tax liability.

Resident corporations are subject to a minimum corporate income tax even in the case of losses. The tax depends on company law capitalization requirements and amounts to €1,750 for a private limited company and €3,500 for a public limited company.

The tax year is equivalent to the calendar year.

Carry-forward of losses
Losses derived in one year which cannot be offset against taxable income derived in the same year may be carried forward for an unlimited period. However, the deduction of losses is restricted to 75% of the income. Consequently, at least 25% of income must be taxed. Remaining losses can be carried forward.

The Austrian Corporate Income Tax Act contains an anti-avoidance provision which restricts the carry-forward of losses in the case of a material change in the organizational, economic or social structure of a corporation.

A corporation's organizational structure is deemed to have changed if all or a vast majority of management is replaced.

A company expansion or diminution (or a change in business area) is deemed to constitute a change in a corporation's economic structure.

Changes with regard to shareholders (eg, sale of shares) are deemed to constitute changes to a corporation's social structure.

All structural changes must be met cumulatively in order for the anti-avoidance provision to apply.

Participation exemption
The Corporate Income Tax Act provides for domestic and international participation exemptions.

Under the domestic participation exemption, any income from a participation which is received by one resident company from another is exempt from corporate income tax, regardless of the extent and holding period of the shareholding in the distributing company. No further conditions are necessary for this exemption. However, the domestic participation exemption does not apply to capital gains realized from a shareholding in a domestic company.

The international participation exemption was amended significantly by the Budget Supplementary Act 2003. The amended international participation exemption in principle becomes effective in 2004. For holding companies in existence before January 1 2001, various grandfather clauses apply.The differences between the old and new law on the international participation exemption privilege are summarized in the table below.

  Old Law New Law
Holding company Resident domestic companies Resident domestic and foreign dual resident companies
Nature of participation Direct equity participations in the form of shares Direct and indirect equity participations
Minimum holding requirement 25% 10%
Minimum holding period Two years One year
Capital gains Exempt Exempt/taxable
Capital losses Deductible Non-deductible/deductible
Insolvency/liquidation losses Deductible Deductible
Anti-abuse provision: switch over from exemption to credit method in cases of suspected abuse of law Not applicable to Austrian holdings held for more than 50% (directly or indirectly) by non-resident individuals Applicable regardless of the shareholder's residence

The new international participation exemption applies to equity participations of any kind and thus also to equity participation rights ('jouissance' rights) resulting from a participation in a foreign subsidiary if the following conditions are met:

  • The foreign EU subsidiary has a legal form listed in the annex to the EU Parent-Subsidiary Directive and is subject to corporate income tax as listed in the annex to the directive with no possibility of opting for taxation or being exempt;
  • The foreign non-EU subsidiary is comparable to an Austrian corporation;
  • The parent company is a resident domestic or foreign company (foreign legal entities that are comparable to an Austrian company obliged to keep books under commercial law (eg, limited liability company or corporation) and that have their place of effective management in Austria, are treated the same way as resident companies and are therefore granted the international participation exemption in respect of their shareholdings);
  • The parent holds (directly or indirectly) at least 10% of the share capital of the subsidiary; and
  • The parent's minimum 10% shareholding is held for an uninterrupted period of at least one year.

The effective date regarding the option depends on the registration of the Austrian holding company. Companies registered before January 1 2001 may exercise the option before 2006. Companies registered after December 31 2000 must exercise the option in the tax assessment for 2004 at the latest. In both cases unrealized capital gains decreased by previous write-offs will remain untaxed. If the option is not exercised, previous write-offs must be recaptured within a period of seven years following 2004 or 2006, as appropriate.

The international participation exemption is also granted to the Austrian permanent establishments of companies resident in any EU member state if they fulfil the aforementioned requirements.According to certain tax treaties the conditions for applying the international participation exemption may be less stringent than the conditions provided for by the EU Parent-Subsidiary Directive and the respective domestic legislation. Sometimes tax treaties do not require a minimum holding period; some may only require a shareholding of at least 10% in order to qualify for an exemption. In addition, certain tax treaties (eg, those with Ireland and Luxembourg) provide for the exemption of foreign dividends based on the conditions of the domestic participation exemption. The international tax exemption does not apply in cases of suspected tax avoidance or abuse of law, which is to be assumed if certain circumstances mentioned under the Corporate Income Tax Act are met.

Withholding taxation on dividends
Generally, dividends and other profit distributions by Austrian holding companies to resident shareholders trigger a withholding tax of 25%. In the case of an individual shareholder, this withholding tax is final. However, if such final taxation is less favourable than one-half of the average tax on the taxpayer's total net income, the latter method will apply if requested by the taxpayer within five years of the distribution of dividends. If the recipient is an Austrian resident corporate shareholder, no withholding tax is due if he or she holds at least 25% of the shares. In all other cases of distributions to resident corporate shareholders, a credit is granted for the withholding tax imposed. If the withholding tax exceeds the recipient's corporate income tax liability, the surplus amount is refunded at the taxpayer's request.

The 25% withholding tax also applies to dividends paid to non-resident shareholders. The withholding tax levied on such distributions is final in Austria. If a tax treaty provides for a lower withholding tax rate, the tax authorities refund the amount overpaid. Treaty relief can be granted at source under special agreements with some countries, provided that certain conditions are met (eg, certificate of residence).

However, under the relevant provisions applicable upon implementation of the EU Parent-Subsidiary Directive in Austria, dividends are exempt from any withholding tax where:

  • the receiving parent company has a legal form listed in the annex to the directive;
  • the parent company owns at least 25% of the capital of the Austrian subsidiary (on the basis of reciprocity, the minimum shareholding will be reduced to 10%); and
  • the shareholding has been held directly for an uninterrupted period of one year.

However, tax must be withheld at source provisionally if dividends are distributed within the one-year holding period. A refund may be granted as soon as the one-year holding period expires. According to a ruling issued by the Ministry of Finance, the exemption from withholding tax also applies if (i) the taxpayer can make sure that the shareholding will be held for an uninterrupted period of one year, and (ii) there is no doubt that the tax could be levied later if this holding period would not be kept. Generally, this result can be obtained if the Austrian dividend distributing company guarantees payment of the tax.

Tax at source must be withheld in the case of tax avoidance, abuse of law and constructive dividends. Tax avoidance or abuse of law is not assumed if the receiving company submits a written form to the distributing company stating that it:

  • derives its income from active business;
  • employs its own personnel; and
  • maintains own business facilities.

Generally, a constructive dividend distribution is assumed if a company grants a benefit to its shareholders which it would not have granted to an independent third party when applying the diligence of a prudent businessperson.

Taxation of a fiscal unity
Each corporate entity is regarded as a separate entity for taxation purposes. Therefore, parent corporations and subsidiaries are taxed separately. However, resident parent corporations and resident subsidiaries (both must be subject to unlimited tax liability in Austria) may elect for fiscal unity if several requirements are met. In such cases taxable profits or losses derived by the controlled subsidiary are attributed to the controlling parent corporation.

The main characteristic of fiscal unity is that the controlling parent corporation dominates the controlled subsidiary corporation financially, economically and organizationally, and a profit and loss transfer agreement is concluded.

Where the parent company owns enough voting rights of the controlled subsidiary to influence every decision, the parent company exercises financial control. Generally, this is possible if the parent company holds more than 75% of the subsidiary's share capital.

A close economic connection in the fields of business of the controlling parent corporation and controlled subsidiary corporation is deemed to constitute economic integration (eg, the parent company produces the products which are sold by the subsidiary).

Organizational control is assumed if members of the board of directors of the parent company are also represented in the board of directors of the subsidiary company.

The profit and loss transfer agreement must include (i) confirmation by the controlled subsidiary that all profits are transferred to the controlling parent corporation, and (ii) confirmation by the controlling parent corporation that it takes over all losses of the controlled subsidiary.

This agreement must be concluded for at least five years and must be signed prior to the balance sheet date in which taxation as fiscal unity is applied for the first time.

The introduction of a favourable group taxation system is planned with effect from 2005. The new system will be applicable under conditions less stringent than under the current fiscal unity (qualified shareholding, directly or indirectly over 50%, will be sufficient). The group taxation system will also work cross-border.

Anti-avoidance Regulations

Domestic tax law does not provide for controlled foreign company legislation. Its introduction has long been mooted, but is unlikely in the near future.

However, a direct attribution of assets of a foreign subsidiary to an Austrian parent company could be based on general tax principles by the Austrian finance authorities under domestic tax law (in particular the principles of 'substance over form' and 'economic ownership').

International participation exemption
Austrian corporate income tax law provides for a special anti-abuse provision regarding the international participation exemption, which applies in the case of suspected tax avoidance or abuse of law and results in a shift from the exemption to the credit method. This anti-abuse provision was amended by the Budget Supplementary Act 2003 under which the ownership test was abolished. The new anti-abuse provision applies regardless of whether the shareholders of the holding company are Austrian residents. The amended anti-abuse provision will first apply in 2006 for holding companies incorporated and registered before January 1 2001. For companies incorporated and registered after December 31 2000, the provision first applies in 2004.Under the new law, tax avoidance or abuse of law can be assumed only if the following conditions are fulfilled: (i) the focus of the foreign subsidiary’s business is to derive (directly or indirectly) interest income, royalties or income from the sale of shareholdings (except for the sale of international holding participations as provided for under the Austrian Corporate Income Tax Act) (rental income from movable or immovable property does not trigger the special anti-abuse provision, provided that the foreign corporation engages its own employees and maintains own business facilities); and (ii) the foreign average tax burden is not more than 15% of the corporate income tax base determined under Austrian tax law. A foreign average tax burden of 15% or less is not detrimental if it is caused by using special depreciation methods or carry-backs or carry-forwards of losses not provided for under Austrian tax law.

Investment Fund Act
The participation exemption of dividends derived from a foreign subsidiary will not apply if the foreign subsidiary is regarded as a foreign investment fund (with no Austrian tax representative) for the purposes of the Austrian Investment Fund Act. In such cases the Austrian company must state 90% of the difference between the market value of the shares at the beginning and the end of a calendar year as taxable income. Ten percent of the market value of the shares at the end of the calendar year is regarded as the minimum taxable base. Such income, however, is not covered by the international participation exemption and, therefore, is fully taxed at the standard corporation tax rate of 34%. A foreign investment fund under the meaning of the Austrian Investment Fund Act exists if the foreign entity (by law, articles of association or practice) structures its investments and spreads its risk on the basis of diversification.

Reorganization of Enterprises

According to general income tax principles, changes in the legal form of companies are subject to tax as liquidation. Only certain kinds of reorganizations, covered by the Reorganization Tax Act, are excluded from liquidation taxation.

The following changes in legal form are covered by the Reorganization Tax Act:

  • special mergers;
  • transformations;
  • contributions of assets; and
  • divisions.

Capital Transfer Tax

Each capital transfer (ie, of cash or other assets) from the shareholder to a domestic corporate entity is subject to capital transfer tax at a rate of 1% of the value of the asset transferred. The capital transfer tax is levied upon foundation of a corporation and further contributions of assets by the shareholders.

Indirect contributions in principle are not subject to the capital transfer tax. However, according to some cases before the European Court of Justice, in specific circumstances capital transfer tax will also be levied on indirect contributions upon a substance-over-form approach. This applies, for example, in cases where in economic terms, the parent company is obliged to make contributions to its subsidiary, but the contribution is actually paid by the indirect shareholder.

Capital transfer taxation can be avoided by using the beneficiary provisions of the Austrian Capital Transfer Tax Act and the Reorganization Tax Act (eg, contribution of all the assets of a foreign corporation for the issuance of new shares, or contribution of a qualified participation (at least 25%) in a corporation which has been held for at least two years).

For further information on this topic, 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]).