Austria Tightens Its Rules for Group Taxation and Deductibility of Intra-Group Interest and Royalties

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.

Introductory remarks

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.

In light of the newly introduced restrictions on intra-group interest and royalty payments, financing and licencing arrangements within a group of companies with an Austrian entity as payer being involved must be set up carefully in order to maintain and ensure tax deductibility of these payments in Austria.