Austria appears to have incorrectly applied a derogation in relation to the implementation of the interest limitation rule contained in the EU's Anti-Tax Avoidance Directive.
The EU's Anti-Tax Avoidance Directive (ATAD), inter alia, requires Member States to implement an interest limitation rule in their domestic laws. Pursuant thereto, the tax deductibility of net interest (interest expenses minus interest income) shall be limited insofar as it exceeds an amount of 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA). In general, this rule should have been implemented by 31 December 2018. However, by way of derogation, Member States which have national targeted rules for preventing base erosion and profit shifting (BEPS) risks as of 8 August 2016, which are equally effective to the interest limitation rule set out in the ATAD, may delay the implementation of the interest limitation rule at the latest until 1 January 2024 (cf. art. 11(6) of the ATAD).
For several years already, Austrian tax law has provided for a non-deductibility of interest paid to a corporation if the payer and recipient are, directly or indirectly, part of the same group, or have, directly or indirectly, the same controlling shareholder; and the interest paid at the level of the recipient (or the beneficial owner, if different) is:
- not subject to corporate income tax owing to a comprehensive personal or material tax exemption;
- subject to corporate income tax at a rate of less than 10%;
- subject to an effective tax rate of less than 10% owing to an applicable reduction; or
- subject to a tax rate of less than 10% owing to a tax refund (refunds to the shareholder are also relevant).
This Austrian non-deductibility rule was implemented in the wake of the OECD's first steps against BEPS. It is probably for this reason that the Austrian Ministry of Finance believes that Austria already has in force "targeted rules for preventing base erosion and profit shifting (BEPS) risks […] which are equally effective to the interest limitation rule", thus allowing Austria to delay implementation of the 30% EBITDA rule. Therefore, in autumn 2018 Austria implemented ATAD, except for ATAD's interest limitation rule.
In this context, the European Commission recently published a list of Member States which in its view fulfil the requirements as per art. 11(6) of the ATAD (cf. Commission Notice 2018/C 441/01). When drawing up the list, the European Commission assessed the legal similarity and the economic equivalence of measures notified by Member States:
- The basic assumption for the examination of legal equivalence was that only measures which ensure limitation on deductibility of exceeding borrowing costs in relation to factors of a taxpayer's profitability may be primarily regarded as equally effective in targeting excessive interest deductions.
- The analysis of economic equivalence in turn involved two criteria: First, the notified national measure should not produce significantly less revenue than the ATAD's interest limitation rule. Second, the notified national measure should lead to a similar or higher tax liability for a majority of large undertakings as compared with the estimated result under the ATAD.
Applying these criteria, the European Commission concluded that specific measures in force in France, Greece, Slovakia, Slovenia and Spain fall under art. 11(6) of the ATAD. The list, however, does not include Austria, meaning that Austria has – in the European Commission's view – incorrectly not implemented the ATAD's interest limitation rule. It is not yet clear how the Austrian Ministry of Finance will react.
Austria: amended treaty with the UK and New treaty with Kosovo
On 23 October 2018, an amended double taxation treaty between Austria and the United Kingdom was concluded. In addition, on 8 June 2018, a new double taxation treaty between Austria and Kosovo was signed. Neither treaty has entered into force yet.
The existing double taxation treaty with the UK dates back to 1969, is obsolete and no longer complies with the latest OECD standard. The amendment of the treaty shall reflect the latest developments in international tax law, and, since the exit of the UK from the EU could lead to a non-applicability of EU directives, shall also prevent any impairment of capital flows. In essence, the following amendments have been introduced:
- The term resident of a contracting state shall include pension schemes and organizations that are established and operated exclusively for religious, charitable, scientific, cultural, or educational purposes.
- In case of doubt regarding the residency of a legal person, the competent authorities shall endeavour to determine by mutual agreement the state in which the place of effective management is exercised; in the absence of such agreement, that person shall not be entitled to claim any benefits provided by the double taxation treaty.
- The withholding tax rate on dividends shall generally be 10%. In case dividends are paid by a relevant investment vehicle (e.g., in Austria, a real estate investment fund which meets the conditions of the Austrian Act on Real Estate Investment Funds [Immobilien-Investmentfondsgesetz]), the withholding tax rate shall be 15%. Further, dividends shall be exempt from withholding tax if the beneficial owner of the dividends is (i) a company that controls directly or indirectly at least 10% of the voting power of the company paying the dividends; or (ii) a pension scheme.
- There shall be no withholding tax on royalties anymore.
- Gains emanating from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property may be taxed in the state where such property is situated.
- Where the competent authorities are unable to reach an agreement to resolve a case on taxation deemed to be not in accordance with the provisions of the double taxation treaty, any unresolved issues shall be submitted to arbitration if the person so requests.
- There shall be a provision on assistance in the collection of taxes.
- A principal purpose test shall apply, pursuant to which, generally, a benefit shall not be granted in respect of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
Finally, the conclusion of the new double taxation treaty with Kosovo (the first of its kind between the two countries) aims at strengthening economic relations with Kosovo by eliminating double taxation; also, currently no legal basis for an exchange of information between the two countries exists which complies with the international standard. Content-wise, the double taxation treaty already takes into account the work at the level of the OECD on the reduction of base erosion and profit shifting (BEPS).
Austria: withholding tax on outbound dividend payments
The Austrian Ministry of Finance recently dealt with an interesting case of dividend payments made from an Austrian corporation to the Austrian permanent establishment of a French indirect shareholder.
Under the Austrian provisions implementing the EU Parent/Subsidiary Directive (cf. sec. 94(2) of the Austrian Income Tax Act [Einkommensteuergesetz]), outbound dividends paid to non-resident shareholders are exempt from withholding tax in Austria, if (i) the shareholder holds a stake of at least 10% in the share capital of an Austrian corporation; and (ii) if the participation has been held for an uninterrupted period of at least one year. If the receiving company is resident in Austria, no minimum holding period is required for the exemption from withholding tax.
The Austrian Ministry of Finance recently established that dividends paid by an Austrian corporation held via a two-tier Austrian partnership structure to its French indirect shareholder are not subject to withholding tax in Austria even if the minimum holding period has not been completed (EAS 3409). The reasoning is based on the following grounds: If the shareholding is functionally attributable to an active trade or business of a domestic (partnership) permanent establishment of a corporation resident in an EU/EEA state, then the freedom of establishment requires that the exemption from withholding taxation applies to corporations resident in an EU/EEA state without the restrictions for foreign companies, i.e. irrespective of the one-year retention period and the additional documentation requirements, in particular a residence certificate.
In the view of the Ministry of Finance, documentation evidencing the entitlement to the withholding tax exemption, nevertheless, has to be kept, e.g., a residence certificate and a written declaration of the non-resident taxpayer, confirming the attribution of the participation to the domestic permanent establishment.
Hungary: New Group Taxation
As of 2019, Hungary has introduced a new group taxation regime, which allows for interesting planning opportunities.
According to the new rules, group taxation can be opted for by at least two entities subject to corporate income tax in Hungary, provided that (i) one of the entities directly or indirectly holds at least 75% of the voting rights in the other entity; or (ii) the same person directly or indirectly holds at least 75% of the voting rights in each entity.
The tax base of the group consists of the positive tax bases of its members. Each group member has to determine its tax base in accordance with the corporate income tax rules. In contrast to the current Hungarian tax legislation which does not allow a taxpayer to utilize losses carried forward by another taxpayer, the negative tax bases of group members may, subject to certain limitations, be utilized to decrease the tax base of the tax group in the tax year and the subsequent five years. Special rules apply to the tax allowances that can be used on a group level. The corporate income tax payable should be allocated to each group member in proportion to their positive tax bases.
In addition to the above, group taxation also substantially eases the transfer pricing obligations (e.g., preparing transfer pricing documentation and adjusting the tax bases) as the group members do not need to fulfil these obligations in respect of transactions effectuated between them.
Hungary: Implementation of ATAD
As many other EU Member States, Hungary has also, as of 2019, implemented certain provisions set out in the ATAD.
As a consequence of the implementation of the ATAD, the general anti-avoidance rule (GAAR), the rules on controlled foreign companies (CFC) and the thin capitalization rules have undergone a major overhaul.
The general anti-abuse rule has been extended to cover arrangements which are contrary to the object or purpose of the applicable tax law and which are not substantiated by a genuine business or commercial reason. Costs and expenses incurred may not be deducted for tax purposes and tax benefits cannot be claimed with respect to such arrangements. Tax benefits may be claimed insofar as the underlying arrangement or series of arrangements is in line with the object or purpose of the applicable tax law and is also substantiated by a genuine business or commercial reason.
The rules on CFCs have been amended significantly. Under the new regime, a foreign entity may avoid qualifying as a CFC if it draws income only from genuine arrangements in the applicable tax year. An arrangement is regarded as non-genuine if its principal purpose is to obtain a tax advantage and the entity does not own the assets and undertake the risks related to earning its income without a domestic taxpayer performing substantial decision-making functions. CFC status can also be avoided if the foreign entity's pre-tax profits do not exceed HUF 244 million (whereof passive income does not exceed HUF 24 million) or its pre-tax profits do not exceed 10% of its operating costs, provided, in both cases, that additional conditions are met. In case of a double tax convention between Hungary and a non-EEA country that exempts income attributable to a permanent establishment located in the non-EEA country from taxation in Hungary, such permanent establishment will not qualify as a controlled foreign company.
The thin capitalization rules have also been put on a new footing. The bottom line of the provisions in force as of the date of this newsletter is that the interest paid on debts in excess of the debt to equity ratio of 3:1 cannot be deducted for tax purposes. This rule is not applicable to liabilities towards financial institutions, i.e., the amount of such liabilities should not be taken into consideration when calculating the amount of debt for thin capitalization purposes. However, the new rules follow a different logic when imposing the following limitation on the deductibility of interest expenses. The exceeding financing costs, i.e., the amount by which the taxpayer's financing expenses incurred for business purposes – including payments on liabilities towards financial institutions – exceed its taxable interest income may be deducted from the tax base up to the higher of the following amounts: 30% of the EBITDA or HUF 940 million (approximately EUR 3 million). The difference between 30% of the EBITDA and the exceeding financing costs which may not be deducted in the applicable tax year can be carried forward, i.e., the amount can be used to decrease the taxable amount of the excess financing costs in subsequent tax years. If the taxpayer is a member of a group preparing consolidated financial statements, then it would not be subjected to the interest barrier rules if it can demonstrate that the ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group (the taxpayer's ratio is also considered to be equal to that of the group if the ratio of the taxpayer's equity over its total assets is lower by up to 2%). Upon applying the interest barrier rules, a taxpayer – as a member of a group preparing consolidated financial statements – may deduct exceeding financing costs in the amount calculated as follows: the exceeding financing costs of the group towards third-parties is divided by the EBITDA of the group and this, in turn, is multiplied by the EBITDA of the taxpayer.
Hungary: VAT Refund on Bad Debts
Based on ECJ case, Hungarian taxpayers may have an opportunity to reclaim value added tax (VAT) in case of bad debts.
In its judgement Enzo di Maura, C-246/16, the European Court of Justice (ECJ) established that Member States are not allowed to exclude the opportunity of reducing value added tax if a customer fails to pay an invoice. This means that according to the ECJ's decision, VAT can be claimed back if a buyer did not settle an invoice. The current Hungarian legislation does not contain provisions on such reduction of the value added tax base in case of bad debts. As this seems to infringe the VAT Directive, taxpayers may consider reviewing the opportunities to reclaim tax.
Poland: Changes in the area of intercompany transactions
A significant amendment to the Corporate Income Tax (CIT) and Personal Income Tax (PIT) laws in Poland has come into force on 1 January 2019, which will bring rules related to transfer pricing in line with updated OECD guidelines and the OECD's Action Plan on BEPS.
The newly introduced changes are partly beneficial for taxpayers:
- Under certain conditions, in relation to low value-added services or intercompany loans with a principal of up to PLN 20 million (approximately EUR 4.8 million), the tax authorities are no longer entitled to assess income in intercompany transactions. The introduction of this "safe harbour" concept will simplify intra-group settlements, in particular in the areas of accounting, HR, and IT.
- The corresponding adjustment mechanism, which has previously been used in relation to cross-border transactions, is now also applicable to domestic intercompany transactions.
- The obligation to set up transfer pricing (TP) documentation in domestic transactions is now limited to cases in which one or both parties report a tax loss or benefit from income tax exemptions.
- The value thresholds that trigger the requirement to prepare TP documentation have been significantly increased and now depend only on the nature of the transaction, rather than on the amount of revenues or costs of the entity performing the transaction.
- The obligation to prepare a master file now depends on a consolidated revenue threshold, and this file may be prepared and kept in English, so that a translation would only be required upon written request of the tax authorities.
The new rules also include some tools for the tax authorities, enabling them to better react to profit shifting:
- The tax authorities can now reclassify the nature of an intercompany transaction if they discover during a tax audit that the transaction realized between related parties is not in line with market standards.
- If the tax authorities recognize that none of the TP methods listed and described in the CIT law apply to the audited transaction, they have the right to use another method for income estimation, even if this method is not regulated by provisions of the law.
- The amendments introduce a requirement to send TP information in an electronic (XML) format. The purpose of this is to equip the tax authorities with data for later transfer pricing analyses and benchmarks, as well as to help select taxpayers for further audits.
The second area of change in Polish CIT law relates to withholding tax on interest and dividends: In order to benefit from a lower withholding tax rate or an exemption from withholding, based on a double taxation treaty or the EU Parent/Subsidiary Directive, the payer of the interest or dividends has to prove that these are to be paid to their beneficial owners. In the absence of such proof, payments above an annual threshold of PLN 2 million (approximately EUR 0.5 million) made to foreign recipients will be subject to the local CIT rate (20% for interest and 19% for dividends). In theory, the tax may later be refunded by tax authorities. The refund procedure has not yet been defined.
To benefit from a double taxation treaty or the EU Parent/Subsidiary Directive without the above-mentioned limit, a Polish payer of dividend or interest has to:
- fulfil the beneficial owner test mentioned above;
- collect the relevant tax certificates and statements from the beneficial owner;
- electronically submit a statement to the Polish tax authorities confirming that the recipient of the payments is the beneficial owner;
- obtain from the tax authorities a statement confirming the right to apply a withholding tax exemption or a lower withholding tax rate without the limits mentioned (binding for 36 months from its issuance).
In summary, while the regulations that took effect on 1 January 2019 simplify the TP documentation requirements, they also give the tax authorities additional tools. In the area of withholding tax, the newly introduced amendments impose on Polish taxpayers’ significant compliance obligations, shifting the burden of proof from the tax authorities to the taxpayer in terms of evidencing that the recipient of certain payments is the beneficial owner. Noncompliance with these obligations may have negative consequences both for the payer and the recipient of interest and dividends.