Executive summary

On 10 April 2018, the Austrian Ministry of Finance published a draft of the Annual Tax Amendment Act 2018 (Jahressteuergesetz 2018). This draft bill includes major changes to the Austrian international tax regime, most importantly with respect to the implementation of controlled foreign company (CFC) rules as required by the European Union (EU) Anti-Tax Avoidance Directive (ATAD) and a corresponding amendment of the International Participation Exemption. This Alert also summarizes the extension of the scope of the binding advance ruling procedure and the introduction of a horizontal monitoring regime, which are (among others) two further key items in the Annual Tax Amendment Act 2018.

Note that the draft bill has been issued for public consultation. Changes during the ongoing legislative process are still possible. It is currently expected that the final law will be passed in early summer 2018.

Detailed discussion

Introduction of CFC rules

For the first time, Austria has introduced a comprehensive CFC regime. Passive income of low-taxed subsidiaries (and permanent establishments) shall be included in the tax base of the Austrian parent and thus be subject to Austrian corporate income tax of 25%, with a credit for underlying foreign taxes. The draft bill thus suggests the implementation of "option a" as laid out in Art 7 para 2 ATAD.

The CFC regime shall apply to Austrian corporations holding a controlling interest (generally defined as more than 50% of voting rights, capital or entitlement to profits) under two conditions:

1. More than one-third of the foreign subsidiary's (or permanent establishment's) income is passive. Passive income is defined as interest and other income from, royalties, dividends and capital gains from the disposal of shares, income from financial leasing, income from insurance, banking or other financial activities and income from invoicing companies.
2. The effective foreign tax rate does not exceed 12.5%. The income of the foreign company must be calculated in accordance with Austrian tax principles in order to make a comparison to the actually paid foreign tax possible.

CFC taxation shall not apply, if the CFC carries on substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. This exemption shall apply both to EU and third-country resident subsidiaries (or permanent establishments).

The introduction of a CFC regime will also lead to an amendment of the current switch-over rule, which shall apply to participations of at least 5% in low-taxed foreign subsidiaries with a passive business focus. Dividends and capital gains from such participations shall not be exempt but subject to 25% corporate income tax in Austria, with a credit for the underlying foreign taxes. When determining the active/passive status of the foreign entity, tax-exempt dividends shall not be relevant. The switch-over rule shall not apply to the extent that profits of the foreign subsidiary have already been included in the Austrian tax based under the CFC regime. This amendment of the participation exemption will generally lead to an improvement for taxpayers, as (unlike under current legislation) the switch-over rule does not cover participations below 5% and for participations between 5% and 10%, the switch-over rule will only apply to low-taxed and passive entities (under current legislation, mere low taxation was sufficient for triggering the switch-over rule for portfolio investments).

Foreign credit institutions pursuant to Art 2 para 5 ATAD shall be exempt from the scope of the CFC regime and the switch-over rule, provided that not more than one-third of the foreign entity's passive income results from dealings with the Austrian parent or its related parties.

The new provisions shall apply to financial years starting after 30 September 2018. The Austrian Ministry of Finance shall be authorized to enact a regulation with details on the application of the CFC regime and the switch-over rule.

Improvement of binding ruling procedure

Austrian tax law currently provides for the possibility to seek a binding advance ruling in the context of corporate reorganizations, group taxation and transfer pricing. The scope of the ruling procedure shall now be extended to questions regarding Value Added Tax, international tax law and the application of the Austrian general anti-abuse rule. The draft law explicitly states that the tax office shall (if possible) provide the advance ruling within two months. This amendment will lead to an improvement of the advance ruling procedure due to the broader access to advance rulings and the increased legal certainty for taxpayers, as well as faster processing time.

Horizontal Monitoring

After a pilot phase over the last few years, a horizontal monitoring regime shall now officially be implemented as an alternative to conventional tax audit procedures. Under certain conditions, taxpayers may opt for an increased cooperation and ongoing communication process with the tax authorities. The new regime shall increase legal certainty for taxpayers and enable a more efficient risk detection.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Steuerberatungsgesellschaft mbH., Vienna

• Andreas Stefaner
  andreas.stefaner@at.ey.com
• Roland Rief
  roland.rief@at.ey.com
• Markus Stefaner
  markus.stefaner@at.ey.com
• Klaus Pfleger
  klaus.pfleger@at.ey.com
• Patrick Plansky
  patrick.plansky@at.ey.com
• Christian Massoner
  christian.massoner@at.ey.com

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ATTACHMENT

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