As a general principle of Austrian corporate tax law, costs relating to non-taxable income or non-taxable gains on assets are not deductible. Since dividends are generally not taxable in the holding company, financing costs relating to the acquisition of corporations were historically not deductible.
This position changed in 2005 when new legislation was enacted, which provided for the deductibility of interest payments relating to the acquisition of shareholdings of at least 10% held for at least one year provided that the shareholding was part of business property. Interest payments, but not other financing costs (such as arrangement fees, banking or legal fees) were deductible. As a result of this legislation groups of companies were able to deduct interest payable in connection with intra-group reorganisations financed by third parties. This was criticized as abuse of the legislation.
In 2011, the laws on the deductibility of financing costs were amended again to restore the original position under Austrian law. Since then, financing costs relating to the acquisition of affiliates within a group of companies (there is no requirement for a 100 % shareholding) are no longer deductible. This applies both to direct and indirect (for example where trustees are interposed) acquisitions within groups of companies. Financing costs payable in connection with the direct or indirect acquisition of shareholdings from controlling shareholders (in non-group companies) are also no longer deductible.
The new law applies not only to new acquisitions, but also to interest payable from 2011 in relation to old shareholdings acquired under the 2005 legislation (and, therefore, to acquisitions, the financing costs for which were assumed to be deductible). Despite heavy criticisicm by taxpayers and commentators, the Austrian Constitutional Court has declared that the partly retroactive effects of the new legislation are in line with Austria’s constitution and do not infringe basic rights guaranteed in Austria (such as the right of ownership).