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.