AUSTRIA: Annual tax Act of 2018 introduces cfc rules
Currently, Austria does not have controlled foreign company ("CFC") legislation. Pursuant to the draft of the Annual Tax Act of 2018 (Jahressteuergesetz 2018), CFC rules will be introduced. The draft bill is currently under review by the first chamber of the Austrian Parliament (Nationalrat).
Under the envisaged CFC provisions, non-distributed passive income of a low-taxed controlled foreign company (wherever resident) shall be included in the tax base of the controlling corporation if the following prerequisites are fulfilled:
- the passive income of the controlled foreign company exceeds a third of its total income (the income is to be calculated in line with Austrian tax provisions, whereby also tax exempt dividends and capital gains are taken into account when calculating the total income);
- the controlling corporation – alone or together with its associated enterprises – holds a direct or indirect participation of more than 50% of the voting rights or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of the controlled foreign company; and
- the controlled foreign company does not carry out a substantive economic activity supported by staff, equipment, assets and premises (in case a substantive economic activity exists, the controlling corporation has to furnish proof thereof).
Passive income encompasses the following types of income:
- interest or any other income generated by financial assets;
- royalties or any other income generated from intellectual property;
- dividends and income from the disposal of shares, insofar as these would be taxable at the level of the controlling corporation;
- income from financial leasing;
- income from insurance, banking and other financial activities; and
- income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.
A foreign company is low-taxed if its effective foreign tax rate is not more than 12.5%. In order to determine the effective foreign tax rate, the foreign company's income is to be calculated in line with Austrian tax provisions and contrasted to the foreign tax actually paid.
For purposes of the CFC rules, an associated enterprise exists if:
- the controlling corporation holds directly or indirectly a participation in terms of voting rights or capital ownership of at least 25% in an entity or is entitled to receive at least 25% of the profits of that entity;
- a legal person or individual or group of persons holds directly or indirectly a participation in terms of voting rights or capital ownership of at least 25% or is entitled to receive at least 25% of the profits of the corporation (if a legal person or individual or group of persons holds directly or indirectly a participation of at least 25% in the corporation and one or more entities, all the entities concerned, including the corporation, shall also be regarded as associated enterprises).
In case the CFC provision kicks in, the amount of the controlled foreign company's passive income to be included in the tax base of the controlling corporation is calculated in proportion to the (direct or indirect) participation in the nominal capital of the foreign controlled company; if the profit entitlement deviates from the participation in the nominal capital, then the profit entitlement ratio is decisive. The passive income of the controlled foreign company is included in that financial year of the controlling corporation in which the controlled foreign company's financial year ends. Losses of the controlled foreign company, if any, are not to be included.
In order to prevent double taxation, the following rules apply:
- A controlled foreign company's passive income is not to be included in the tax base of a controlling corporation which only holds an indirect participation in the controlled foreign company in case such passive income is already included in the tax base of an Austrian controlling corporation holding a direct participation in the controlled foreign company.
- If the controlling corporation disposes of its participation in the controlled foreign company, the capital gains are tax exempt insofar as these have previously been included in the controlling corporation's tax base.
- When including the controlled foreign company's passive income in the controlling corporation's tax base, upon application, the tax effectively levied at the level of the controlled foreign company on such passive income as well as passive income included at the level of the controlled foreign company due to comparable foreign CFC legislation is credited. If the foreign tax to be credited exceeds the controlling corporation's Austrian corporate income tax, tax credits can upon application also be claimed in the following years.
The CFC rules also apply to Austrian corporations having their place of management outside of Austria and to foreign permanent establishments (even if an applicable double tax treaty provides for a tax exemption in Austria).
In the absence of CFC rules, the Austrian tax system currently prevents taxpayers from transferring excess liquidity to low-taxed foreign subsidiaries and from repatriating the resulting income in a tax free manner through the so-called switch-over provision: Dividends and capital gains from low-taxed passive income earning subsidiaries do not benefit from the international participation exemption, but are taxable, with a credit for the underlying taxes (thus, there is a switch from the exemption to the credit method). This switch-over provision will in the future apply to the following types of participations if the predominant focus of the low-taxed foreign corporation is on earning passive income:
- shareholdings of at least 10% held for a minimum duration of one year in a foreign subsidiary qualifying under the EU Parent Subsidiary Directive or being legally comparable to an Austrian corporation; and
- shareholdings of at least 5% in a foreign subsidiary qualifying under the EU Parent Subsidiary Directive or in a foreign subsidiary being legally comparable to an Austrian corporation and having its legal seat in a state with which Austria has agreed to the comprehensive exchange of information.
The switch-over provision does not apply if passive income has demonstrably been taken into account under the CFC provision mentioned above.
Both the CFC rules and the switch-over provision will not be applicable to foreign financial institutions if not more than one third of the passive income stems from transactions with the Austrian controlling corporation or its associated enterprises.
These statutory changes shall be applicable to financial years starting on or after 1 January 2019.
AUSTRIA: Annual Tax Act OF 2018 clarifiES ASPECTS OF real estate transfer tax
The government bill of the Austrian Annual Tax Act 2018 (Jahressteuergesetz 2018) includes important clarifications on share consolidation in the context of real estate transfer tax ("RETT").
Pursuant to the Austrian Real Estate Transfer Tax Act, RETT is triggered not only upon the transfer of Austrian real estate, but also if at least 95% of the shares in a property owning company are transferred or consolidated in the hands of one single owner (or corporations which are part of the same tax group for Austrian corporate income tax purposes). It was unclear for some time whether only direct share transfers or also indirect share transfers can trigger Austrian RETT.
The draft bill for the Annual Tax Act of 2018 clarifies that real estate is attributed to the company and not to its shareholder. In this way the Austrian legislator clearly states that indirect shareholder changes in a property owning company do not trigger Austrian RETT, since shareholders are not regarded as property owners.
AUSTRIA: Annual Tax Act OF 2018 INTRODUCES NEW TYPES OF formal tax rulings
The government bill of the Annual Tax Act of 2018 (Jahressteuergesetz 2018) provides for new types of formal tax rulings.
Pursuant to sec. 118 of the Federal Fiscal Procedures Act, legally binding tax rulings (Auskunftsbescheide) can currently be obtained in Austria for the following topics: (i) reorganizations; (ii) group taxation; and (iii) transfer pricing. The government bill of the Annual Tax Act 2018 provides for an extension of the available topics in order to include the following: (i) international tax law (i.e., transfer pricing, tax treaties, but not domestic law provisions; as of 1 January 2019); (ii) value added taxation (as of 1 January 2020); and (iii) the existence of abuse of law in an envisaged structuring (as of 1 January 2019). One of the main prerequisites for receiving a tax ruling is that the facts of the anticipated transaction on which the tax ruling is based have not yet materialized. However, a tax ruling may nevertheless be issued if the facts of the case materialized at a point in time when there was no possibility to receive a tax ruling.
As planned, a tax ruling shall be issued within two months upon the underlying application. This time period may only be exceeded due to an extraordinary complexity of the request made. Also, organizational measures shall enhance the possibility for a taxpayer to post queries with the competent administrator in the event of ambiguities.
AUSTRIA AND RUSSIA SIGN AMENDING PROTOCOL TO THE DOUBLE TAX TREATY
On 5 June 2018 an amending protocol ("Amending Protocol") to the double tax treaty concluded between Austria and Russia ("DTT AT/RU") was signed. It, inter alia, provides for changes of the articles on dividends, capital gains, elimination of double taxation and exchange of information. Further, it introduces new provisions on assistance in the collection of taxes and on limitation on benefits.
As regards dividends, art. 10(2)(a) of the DTT AT/RU as currently in force provides that the tax levied by the source state shall not exceed 5% if the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends and the participation exceeds USD 100,000 or an equivalent amount in any other currency. Pursuant to the Amending Protocol, the requirement that the participation has to exceed USD 100,000 shall be abolished. Further, the definition of the term "dividends" shall be broadened so as to also encompass payments on units of mutual investment funds or similar collective investment vehicles (other than collective investment vehicles organized primarily for investing in immovable property, if at least 10% of the units or other rights of such a vehicle belongs to the beneficial owner of that income).
A real estate clause shall be added to art. 13 of the DTT AT/RU, pursuant to which gains from the alienation of shares or similar rights deriving more than 50% of their value directly or indirectly from immovable property situated in the source state may be taxed in the source state. This shall not apply to gains derived from the alienation of shares in the course of a corporate reorganization or of shares listed on a registered stock exchange. While in case of Austrian residents double taxation is generally eliminated by application of the exemption method, the credit method shall apply to such capital gains.
Art. 26 on exchange of information shall be replaced by an exchange of information clause which corresponds to that contained in the OECD Model Convention (but provides that a contracting state shall not be obliged to supply information which could be contrary to the basic rights granted by a state, in particular in the area of data protection).
The Amending Protocol contains a new article 26(1) on the assistance in collection of taxes to the extent needed to ensure that any exemption or reduced rate of tax granted under the DTT AT/RU shall not be enjoyed by persons not entitled to such benefits. The competent authorities of the contracting states may by mutual agreement settle the mode of application of this article.
Further, the Amending Protocol provides for a new article 26(2) on limitation of benefits. Pursuant thereto, a resident of a contracting state shall not receive the benefit of any reduction in, or exemption from, tax provided for in the DTT AT/RU by the other contracting state if the main purpose or one of the main purposes of such resident or a person connected with such resident was to obtain the benefits of the DTT AT/RU.
The provisions of the Amending Protocol will become effective at the earliest as of 1 January 2019.
Austrian tax authorities on cloud mining OF CRYPTOCURRENCIES
In Austria, as in many other countries, there are no explicit rules in the Income Tax Act or Value Added Tax Act which specifically deal with cryptocurrencies. The Austrian Ministry of Finance released some guidance last year which, although helpful in most respects, is definitely not comprehensive.
Recently, however, the Ministry of Finance has clarified the treatment of cloud mining activities (EAS 3401 of 30 April 2018). Cloud mining refers to the mining of cryptocurrencies via a remote datacentre; users can thus mine bitcoins or altcoins without themselves having to own and manage the necessary hardware. In its statement, the Ministry of Finance deals with the interesting question whether cloud mining activities may constitute a permanent establishment. In the case analysed, a Swiss company had participated in an Austrian cloud mining project relating to cryptocurrencies. Obviously, should there have been a permanent establishment in Austria, then Austria could – under domestic and treaty law – have taxed the profits of the Swiss company.
At the outset, the Ministry of Finance noted that the official commentary on article 5 of the OECD Model Convention does not deal with cloud mining. Under article 5(1) of the double taxation treaty concluded between Austria and Switzerland, an enterprise has a permanent establishment if it has a fixed place of business in the other state at its disposal in which the business of the enterprise is wholly or partly carried out. In this respect, past case law on servers has held that a permanent establishment can be assumed to exist even though no personnel were physically required at these premises.
In summary, the Austrian Ministry of Finance distinguishes between two cases: In the first case a taxpayer owns or rents computer equipment to carry out mining activities and has such equipment at its disposal (either in its own premises or in a datacentre); here the equipment may indeed be considered as constituting a permanent establishment. In the second case a taxpayer merely rents computer capacity from a company engaged in cryptocurrency mining activities, without the taxpayer having the computer equipment at its disposal; here the taxpayer cannot be considered as having a permanent establishment (as is the case with other types of cloud services).
Austrian permanent establishment for aN Italian general contractor
The Austrian Ministry of Finance published guidance on the circumstances regarded as sufficient to establish a permanent establishment for an Italian general contractor in Austria.
In the case at hand, an Italian general contractor had entered into an agreement with its Austrian subsidiary for providing construction and installation services pursuant to article 5(2)(g) of the double taxation treaty concluded between Austria and Italy ("DTT AT/IT"). Such services were subcontracted to an Italian subsidiary of the general contractor, which performed the services for 22 months at the premises of the Austrian company using its own employees. It was certain that the activities of the subcontractor were sufficient to establish a permanent establishment in Austria. What was not evident at first glance was that under certain circumstances a permanent establishment in Austria may also be constituted for the general contractor. This would have been the case if the general contractor had kept the power to factually dispose of the construction site. The latter requirement would have been the case if it had obtained legal ownership of the site, controlled access and usage of the site and had the overall responsibility during the construction period. In such cases, the general contractor is present at the construction site because of its supervisory activities and regarded as performing activities of the building site or construction or installation project.
In a usual setting the general contractor will have the overall responsibility for the project performed at the construction site, as generally it is the only contracting party of the recipient. If, however, the overall functions are delegated to the subcontractor in a way that the general contractor does not have overall responsibility, it is to be assumed that the site will no longer be at the disposal of the general contractor. In such cases, it has to be determined which other functions are performed by the general contractor and defined whether its involvement is based on significant economic grounds in order to ultimately assess whether a permanent establishment may be constituted.
The Ministry of Finance further noted that even if the general contractor had a permanent establishment in Austria, only profits attributed to such permanent establishment may be taxed in Austria. Therefore, if all functions related to the project in Austria were performed in Italy there would be no taxable profit in Austria.
POLAND: New laws on counteracting TAX fraud in the financial sector
To counteract tax evasion, Poland has recently introduced legislation allowing the tax authorities to block suspicious bank accounts.
One of the new laws introduces a computerized clearing house system under which banks and credit unions are obliged to report information regarding the accounts they maintain (e.g., openings, changes, and transactions) to the system on a daily basis. Using algorithms that take risk criteria into account (e.g., economic, geographical, behavioural, and business connections), the system calculates a risk ratio for each entity and passes that information on to the tax administration. The tax administration may block a bank account if the analysis indicates that there is a risk that the account holder has committed or is about to commit fiscal fraud.
The obligation to process bank account data in the system and the mechanism of bank account blockage concerns only one type of bank account under Polish banking law, namely settlement accounts.
A bank account can be blocked for a period of no longer than 72 hours from delivery of the tax administration's decision to the bank. Although the decision is discretionary, it should be justified by past tax performance of the account holder, and, based on such performance, an assumption that the account holder may use the account for fraud related purposes, and that the blockage of the account is necessary to counteract fraud. The initial 72-hour blockage may be extended to three months should the tax administration identify a risk that existing or future tax obligations of the account holder will not be performed.
During the blockage period, an affected bank account may not be subject to new security interests. It has not been specified whether existing security interests (e.g., a financial pledge) expire or are suspended or continue to apply during the blockage period.
The risk of a bank account being blocked under the new law may have an effect on escrow accounts that are commonly used in financing, real estate and M&A transactions. Escrow accounts are typically opened with the banks by buyers as settlement accounts used to centrally clear various (and often numerous) payments associated with a transaction (the sequence and immediate performance of respective payments being crucial elements of the transaction). The sources and uses of these payment arrangements can be very complex and the tax authorities may, therefore, consider payments into or from an escrow account as having the potential of financial fraud. In a worst-case scenario, money could be blocked in a buyer's account even though the title to shares or real property has already been transferred.
The risk of an escrow account being blocked may be minimized by conducting a tax due diligence on the buyer (the escrow account holder), which should include a tax clearance certificate and, most importantly, a check of the account holder's VAT status. While these measures provide a certain degree of comfort, they do not entirely eliminate the risk of an account being blocked.
In lieu of escrow accounts, we believe that parties should consider using trust accounts to settle their transactions. Trust accounts are not subject to the reporting obligations under the new laws and cannot be blocked by the tax administration. Furthermore, amounts deposited in trust accounts may not be seized in enforcement and insolvency proceedings over the account holder. Additionally, there may be contractual measures between the account holder and the bank which may further enhance the holder's position. Consideration should also be given to including provisions dealing with the possibility of an account blockage into transaction documents.
(Anna Sekowska / Michał Kulig)
POLAND: "Split payment" regulation
Split payment is a mechanism aimed at combating VAT fraud in Poland which entered into force on 1 July 2018. Any payment made by a business entity to its suppliers may be divided into two separate payments, i.e., a payment of the net amount and a payment of the VAT amount.
This split payment means that a supplier has to provide two separate bank accounts, i.e., a regular account and a VAT account. The amounts collected by a business entity on its regular account are freely disposable. The money collected on the VAT account may only be used for payments made to VAT accounts of suppliers, payments of VAT to the tax authority, or for other purposes at the discretion of the tax authority.
Usage of the split payment mechanism will be voluntary, which means that it is up to the business entity to decide whether or not to pay the gross amount to the regular account of the supplier or to divide the payment into a net amount and a VAT amount to be paid into the separate accounts of the supplier. There are some incentives envisaged by the VAT law for taxpayers in order to encourage them to use the split payment mechanism and certain significant state-controlled enterprises have declared that they will impose the split payment mechanism upon their contractors. The Polish tax administration has stated that eventually such split payments will become obligatory.
It is worth mentioning that the split payment mechanism will apply only to B2B transactions and only to PLN accounts (i.e. not to the foreign currencies accounts). Any banks holding regular accounts for Polish VAT payers will be obliged to open new VAT accounts for their clients alongside the regular accounts.
The new laws may cause certain cash flow issues for businesses as the funds collected on the VAT accounts will have limited use. This will have an impact not only on manufacturing and trading companies, but will also affect financial institutions providing factoring services, which may require renegotiating existing arrangements with their clients.
(Anna Sekowska / Michał Kulig)
HUNGARY: real time invoice reporting
VAT represents Hungary's largest source of revenue. The most recent measure to counter VAT fraud is the obligation of taxpayers to electronically disclose data on certain invoices to the tax authorities. The aim of the electronic reporting of invoices is to ensure that the tax administration has real time access to invoices.
Since 1 July 2018, (at least) the mandatory contents of invoices as specified in the Hungarian VAT Act should be provided to the tax authority electronically. This requirement only concerns invoices of taxpayers registered for VAT in Hungary, provided that the VAT charged in the invoice amounts to at least HUF 100,000 (approximately EUR 310).
Invoices from cash registers are not subject to this obligation (the cash register will continue to provide data on such invoices). This data disclosure obligation also does not cover reverse charge transactions (as no VAT is charged in invoices regarding such supplies). However, a taxpayer may decide to submit data on all invoices issued to resident taxpayers regardless of whether VAT is charged in the invoice or the amount thereof. The taxpayer may also decide to voluntarily disclose additional information regarding the invoices.
In case of invoices issued by invoicing software, the invoice data should be transmitted to the tax authority in real-time, without human intervention, immediately when the invoice is issued. Therefore, the data-supply function of the invoicing software has become a requirement in this respect, i.e., the software should be able to ensure the electronic transfer of at least the mandatory data content to the tax authority. An invoice is considered to be issued if the invoicing software has foreclosed the further modification of the data indicated therein (such modification can only be affected by issuing another document).
In case of manual invoicing, the data of the invoice should be recorded on the web interface provided by the tax authority within five calendar days of its issuance. However, if the VAT charged in the invoice amounts to at least HUF 500,000 (approximately EUR 1,548), then the data of such invoice should be recorded on the web interface on the day following the day on which the invoice was issued.
As a prerequisite for complying with the electronic data disclosure obligation, the taxpayer should register with the designated portal of the tax authority.
A default penalty for each affected invoice may be imposed upon the taxpayer for non-compliance with the data disclosure obligation (or for its late, incomplete, erroneous performance as well as for providing false data). The amount of such penalty is HUF 200,000 (approximately EUR 619) per affected invoice in case of private individual taxpayers and HUF 500,000 (approximately 1,548 euros) per affected invoice for other taxpayers. Based on the official communication of 1 July 2018, however, the tax office will not levy the above default penalties in first month provided that the taxpayer has registered on the online real time invoice reporting system and provides the relevant invoice data for the first month by the end of July at the latest.
Should you have any questions regarding tax matters in Austria or any of our other jurisdictions, please contact:
Members of the WOLF THEISS Tax Practice Group (in alphabetical order):
DIMITROV Melanie, Consultant (Austria)
GRUBESIC Ana, Senior Associate (Croatia)
IFTIME-BLAGEAN Adelina, Counsel (Romania)
KLEYTMAN Rebeka, Senior Associate (Bulgaria)
MIHAYLOV Atanas, Senior Associate (Bulgaria)
MYŠKA Jan, Partner (Czech Republic)
NAKO Sokol, Partner (Albania)
NASTRAN Neja, Associate (Slovenia)
NIKODEMOVA Zuzana, Senior Associate (Slovak Republic)
PASZTOR Janos, Senior Associate (Hungary)
PFISTER Cynthia, Associate (Austria)
RADEVA Yanitsa, Associate (Bulgaria)
RAZUVAIEV, Mykhailo, Associate (Ukraine)
SCHMIDT Niklas, Partner (Austria)
SEKOWSKA Anna, Senior Associate (Poland)
SKOCIC Nevena, Associate (Serbia)
STADLER Eva, Counsel (Austria)
STAWOWSKA Karolina, Partner (Poland)
TOTH Alexandra, Associate (Hungary)
WIEWIORKA Izabela, Consultant (Poland)
WOLF THEISS was one of the first Austrian law firms to advise on tax law and has been setting the standards ever since. Our experience covers a wide range of disciplines, from corporate tax advice for reorganisations and M&A to tax disputes and litigation, financial products, holding companies, fiscal criminal law and private clients. For many years now we have successfully expanded the tax practice also to our other offices. We are known for offering clear solutions for challenging cases in a very efficient manner, which has been recognised by the international legal community many times.
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