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Austria - response to BEPS

Austria - response to BEPS

Austria has been affected by the tax morality debate, and there is public and political pressure to address the issue. Tax authorities are scrutinizing companies with multinational operations more closely, and in response, many companies are taking a cautious approach to tax planning, wary of unwanted and unwarranted media attention.

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Also driving this wait-and-see attitude is uncertainty about what specific tax law changes will result from the OECD BEPS project. The Austrian government has fully supported the BEPS initiative, and the indications are that it will implement the recommended reforms. Even though Austrian tax law already include a series of anti-avoidance provisions, some further measures are required to comply with the OECD and EU standards.

While the details are still pending, companies are reviewing their current structures with an eye to curbing practices that may be viewed as aggressive. Structures that are purely taxdriven, for example, could be altered.

Interest deductibility

Due to a Corporate Income Tax (CIT) Act amendment, interest payments to low-taxed group companies are no longer deductible for tax purposes as of 1 March 2014.

The restriction applies where:

  • the recipient (i.e. beneficial owner) of interest incomeis a group-affiliated corporation or a corporation underthe controlling influence of the same shareholder as thepayer, and
  • the interest payments are at the level of the recipient:
    • tax-exempt
    • subject to a nominal tax rate of less than 10 percent
    • subject to an effective tax rate of less than 10 percentdue to a beneficial regime in the receiving state, or
    • subject to a tax rate of less than 10 percent because ofa tax refund (including tax refunds to the shareholdersand tax refunds in later years).

The explanatory notes to the law indicate that harmful low effective taxation is assumed if the receiving entity is subject to a (partial) tax exemption or benefits from fictitious interest deductions. Harmful low taxation is not assumed if the receiving company pays little or no tax because of its own losses or losses from a group taxation arrangement.

If the direct recipient of the interest payments is not considered to be the beneficial owner of the interest income, taxation at the level of the beneficial owner will be relevant.

Additionally, interest deductibility is denied for debt-financed acquisitions of intragroup shareholdings.

In light of the forthcoming transposition of the EU ATA Directive's interest limitation rule, the Austrian government will have to reconsider the targeted interest restrictions currently in place. The Austrian legislator is expected to defer the implementation of the general interest limitation rule as long as possible (by 1 January 2024, according to the EU ATA Directive).

CFC Taxation

Current Austrian taw law does not have specific regulations for CFC taxation. Therefore, Austria is obligated to introduce CFC taxation in line with Article 7 of the EU ATA Directive by theend of 2018. These rules are being drafted and expected to be published in 2018. The existing switch-over rules for dividend distributions will probably be amended or abolished as a result.

Transfer pricing

Austria implemented new rules governing transfer pricing documentation in line with Action 13, with effect for business years starting 1 January 1 2016. The legislation follows the three-tiered documentation approach included in the OECD’s final report. Thus, master and local files are required for Austrian companies that are part of a multinational group with sales exceeding EUR50 million in the 2 preceding financial years. CbyC reporting is required for multinational groups with global consolidated group turnover of EUR750 million or more. These requirements are adding more layers of effort and transparency for companies in Austria.

Horizontal monitoring

While not strictly related to BEPS, horizontal monitoring is aninnovative and increasingly popular means of tax reporting in Austria. The taxpayer signs a declaration obliging their company to disclose records to the authorities. The two sides meet on an ongoing basis to discuss which tax practices are allowable and which are not, and after some years, audits are no longer conducted.

Although the start-up phase requires effort, the system provides a win-win in the long term: both sides get security and certainty, and animosity and its associated costs are avoided.

On the horizon

While some regulations have already been integrated into Austrian tax law (e.g. Action 13), we expect changes to other tax measures, such as hybrids, taxation of IP, CFC rules, PE regulations and general interest limitations. Given that Austrian tax law has not included CFC rules and general interest limitations so far, corporate tax legislation is expected to undergo fundamental reforms. The details and the transitional procedure of these changes are still to be determined.

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