Austria Tightens Its Rules for Group Taxation and Deductibility of Intra-Group Interest and Royalties
→ Michaela Petritz-Klar
In light of the BEPS report, discussions on the OECD level and budgetary restraints, in early spring 2014, Austria introduced some significant restrictions, in particular in light of the Austrian group taxation regime and the tax deductibility of intra-group interest and royalty payments made to non- or low-taxed group recipients. These changes may affect international tax structures involving Austrian holdings and should thus be considered thoroughly in order to avoid negative effects.
In early spring 2014 some significant changes were introduced to Austrian tax law by the Austrian Tax Amendment Act 2014. Part of these changes was due to the discussions on an international level in light of the OECD BEPS report, whereas budgetary restraints may also be brought forward as a reasoning for introducing these restrictions. The following is a brief summary of some selected changes introduced in the course of these amendments that may affect international tax planning as well as established structures.
Changes to Austrian group taxation regime
Upon its introduction in 2005, the Austrian group taxation regime was quite flexible, enabling foreign subsidiaries to become part of a tax group irrespective of their tax residency if the general criteria were fulfilled. The main advantage of including foreign subsidiaries in an Austrian tax group is to enable the group to consolidate losses suffered by foreign group members with profits achieved by Austrian group entities for tax purposes, thereby reducing the overall tax burden. Although the use of these foreign tax losses is temporary (due to specific recapture provisions), some significant tax benefits can be achieved.
The Austrian Tax Amendment Act 2014 introduced two restrictions in light of comprising foreign group members into an Austrian tax group.
First, only those foreign subsidiaries are eligible as group members that are resident in (i) an EU member state or (ii) a state with which Austria has a comprehensive administrative assistance agreement in place. The reasoning for introducing this restriction is to enable Austrian tax authorities to require reliable information from the residence state of the foreign group member to determine and treat tax losses claimed to be offset within the Austrian tax group. In the past the quality and reliability of information provided by the taxpayer varied considerably (significantly depending on the residence state of the foreign group member). Group members not resident in an eligible state are automatically withdrawn from the tax group, as of 1 January 2015, with any losses attributed to the top-tier entity in the past being subject to an obligatory recapture to the extent no such recapture had previously taken place. As a relief, the amount of tax losses to be recaptured as a result of this automatic withdrawal are to be spread over a period of three years.
Second, a new limitation on the amount of tax losses of (eligible) foreign group members attributed to the top-tier group entity was introduced, thereby limiting such amount to 75% of the positive income of Austrian group members.
Furthermore, the Austrian group taxation regime enabled the taxpayer to claim a tax-deductible goodwill amortisation in case of a share deal in the course of which an Austrian operative entity is acquired. Any goodwill determined in a share deal was to be amortised over 15 years. Considering that the scope of such goodwill amortisation was limited to the acquisition of shares in an Austrian operative entity, it was doubtful whether such provision was in line with the EC Freedom of Establishment. In tax proceedings these arguments were brought forward to the Austrian Supreme Tax Court. Such appeal may backfire since the Austrian Supreme Tax Court submitted a request to the ECJ; however, with first raising the issue of whether the goodwill amortisation may qualify as (a non-disclosed) state aid. If the ECJ were to qualify goodwill amortisation as state aid, Austrian entities that have claimed goodwill amortisation in the past may face signification repayment obligations.
In light of these developments, goodwill amortisation was completely abolished for acquisitions on or after 1 March 2014. Under specific circumstances, goodwill amortisations claimed in the past may continue to be tax deductible over the 15 years amortisation period.
Limitation on deductibility of intra-group interest and royalty payments
Other than transfer pricing limitations, thin cap rules and a restriction on debt raised for the intra-group acquisition of shares, Austrian tax law did not provide for any further restrictions on the tax deductibility of interest payments. For royalty payments, again transfer pricing rules had to be observed.
As of 1 March 2014, a limitation on the deductibility of intra-group interest and royalties was introduced, mainly targeting payments made to non- or low-taxed foreign corporate recipients of these payments. To determine whether such restriction apply, it first must be determined which entity is to be treated as the recipient of these interest and royalty payments. For this purpose, the beneficial recipient is decisive, thereby taking into account back-to-back structures as well as risk allocation, substance, etc.
The scope of this newly introduced rule is limited to beneficial recipients that are directly or indirectly part of the same group as the Austrian payer, or directly or indirectly under the control/influence of the same shareholder as the Austrian payer. However, even financing provided by a third party (eg, a bank) may – based on the concept of the beneficial recipient – be covered by this limitation, in particular if a back-to-back scenario is given. This concept is intended to cover scenarios whereby, for example, a third party (or an orphan vehicle) grants a loan to the Austrian subsidiary with the foreign (low-taxed) parent providing the financial means to that third party (or the orphan vehicle).
The criteria of non- or low-taxation are defined as follows (note: the fulfillment of one criterion will trigger application of the restrictions):
- Non- or low taxation due to a personal exemption or a special regime.
This criterion targets double-dip structures where, due to the hybrid nature of a financing instrument (qualification as debt in the residence state of the payer, qualification as equity in the residence state of the recipient), the payments are treated as tax-exempt dividends on the level of the recipient. Such criterion is not deemed fulfilled if no (or low) taxation is the mere result of being part of a foreign group taxation regime where the profit is attributed and taxed on the level of another group entity.
- The tax rate is below 10%.
Such criterion refers to the nominal tax rate being applicable to interest/royalty income in the state of residence of the recipient.
- The effective taxation of interest/royalty income is below 10%.
This criterion targets scenarios where the nominal tax rate applicable to interest/royalty income is 10% or more, but the effective tax rate drops below that 10% threshold due to the domestic tax law, providing the possibility to claim fictitious tax expenses or a partial tax relief for such interest/royalty income.
Due to its rather broad wording, the exact scope of this provision and its interpretation is currently subject to ongoing discussions with the Austrian Ministry of Finance. Furthermore, although the wording of this provision does not restrict its applicability to non-Austrian corporations, the fact that only non- or low-taxed entities will effectively be comprised leads to a discrimination of cross-border financing structures, thereby raising doubts as to the provision’s compliance with the EC Freedom of Establishment or EC Freedom of the Free Movement of Capital.
This new provision entered into legal effect as of 1 March 2014, thereby covering interest/royalty payments affected on or after this date, irrespective of when the underlying contractual relationship (eg, loan or licence agreement) has been entered into. Since therefore also interest and royalties paid under agreements concluded prior to 1 March 2014 are comprised by this limitation, a thorough scrutiny (and potentially also a re-arrangement) of existing intra-group financing and licencing schemes is required to avoid the denial of the tax deductibility of interest and royalty payments on the level of an Austrian group company.