Austrian Tax News. Substantial changes in tax information exchange between Austria and the EU. In this issue. Issue 36, August 2012

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1 Austrian Tax News In this issue Direct Taxes Substantial changes in tax information exchange between Austria and the EU by Christian Gatterer and Doris Bramo-Hackel Tax law changes due to the Austrian Tax Amendment Act 2012 by Bernd Hofbauer and Rupert Wiesinger Amendments to the anti-avoidance provision in case of cross-border mergers by Marlies Steindl and Thomas Schneider Inter-company share deals Constitutional Court confirms restrictions on interest deductibility by Marlies Steindl and Thomas Schneider Austrian tax group regime: Sandwich tax groups allowed by Austrian Ministry of Finance by Kerstin Kneidinger and Alexander Wagner Domestic income of a profitable foreign group member by Richard Jerabek and Daniel Stöphasius Controversial decisions of the Independent Fiscal Senate regarding retroactive contributions by Richard Jerabek and Ulrike Koller Cross-border tax treatment of carried interest by Guelay Karatas and Mathias Benedict Knittel Liquidation of a German corporation s Austrian subsidiary by Guelay Karatas and Mathias Benedict Knittel Indirect Taxes Refund of Austrian energy tax: exclusion of service providers as of February 2011 by Alexander Wagner Austrian Tax Facts and Figures Substantial changes in tax information exchange between Austria and the EU The proposed changes in draft legislation will lead to substantial changes regarding Austria s commitment with respect to administrative cooperation within the EU. The draft legislation requires cross-border cooperation regarding the exchange of fiscal information between the Member States and is supposed to ease administrative proceedings. Previously, Austria was only obliged to forward specific tax information to the authorities of other EU Member States upon special request of the foreign authority. In addition, various formal proceedings had to be observed. The current draft provides for an automatic information exchange system for tax periods starting in According to the existing EU Directive, Austria is obliged to automatically provide specific tax information to the fiscal authorities of other EU Member States, in case a foreign tax resident derives income from certain sources in Austria (e.g. income from immovable assets or director s remuneration). Furthermore, the scope of the permissible application of administrative cooperation is to be widened. However, VAT matters or social security contributions are still not covered under the new legislation. The introduction of standardised forms for the application process between two states is supposed to ease administrative proceedings. The draft bill also enforces the cross-border assignment of investigators of foreign authorities.

2 As with previous legislation, the draft provides for administrative cooperation only in the event that the requesting Member State has already exploited all other means of gathering information itself. However, Austria will then not be allowed to refuse an information request only on the basis of its existing regulations regarding bank secrecy. Incoming information requests will have to be dealt with within six months. This period might also be reduced to two months in certain cases. The draft bill is supposed to enter into force in January The launch of the automatic exchange system is scheduled for the beginning of Potential changes made to the draft legislation in the course of parliamentary proceedings will have to be monitored Tax law changes due to the Austrian Tax Amendment Act 2012 A number of changes have been incorporated. PwC summarizes the main points: In line with the EU VAT Directive 2008/8/EC, the B2C long-term hiring of means of transport will be taxable at the place where a private customer is established, has his permanent address or usually resides. In order to prevent tax evasion with respect to supplies of goods or services involving family or other close personal ties (management, ownership, etc.), the taxable amount is to be the market value instead of the invoice value if the recipient is not entitled to full input VAT recovery. The VAT invoicing rules of VAT Directive 2010/45/EC have been transposed into national law. The main purpose of the Directive is to simplify the rules for electronic invoicing with the aim of helping European businesses reduce their administrative costs and improve the European business environment. Accordingly, electronic invoices may be issued without electronic signature if an audit trail is provided. A taxpayer providing intra-community supplies of goods or reverse charge services is to issue an invoice at the latest by the 15th day of the month following the month during which the taxable event took place. It is sufficient to mention on the invoice that the customer is subject to VAT by adding reverse charge. In case the application of the reverse charge mechanism is mandatory, the invoicing rules of the Member State where the recipient is established are to be considered. Furthermore, a tax exemption for therapeutic masseurs is explicitly introduced. Finally, the ECJ decision of 6 October 2011 (C-421/10; Stoppelkamp) has been implemented into national law. With respect to the application of the reverse charge system, a taxable person is not deemed to be established in Austria if neither the seat of its economic activity nor the permanent establishment supplying the service are located in Austria. All regulations will come into force by 1 January bernd.hofbauer@at.pwc.com rupert.wiesinger@at.pwc.com

3 Amendments to the anti-avoidance provision in case of cross-border mergers Under the Austrian participation exemption regime, dividends from and capital gains on the sale of qualifying shareholdings in foreign subsidiaries are generally tax-exempt. However, a switch-over to the credit method applies in case the foreign subsidiary earns passive income whilst being subject to an effective tax rate that is significantly lower than that in Austria (especially if it is below 15%). This provision aims to prevent Austrian resident companies from shifting certain highly mobile sources of income (e.g. portfolio investments, receivables, intellectual property rights) to low-tax jurisdictions and repatriating the proceeds (e.g. interest income, royalty income) via tax-exempt dividend distributions. Unlike CFC rules, no Austrian taxation will apply until the foreign subsidiary is sold, liquidated or effects dividend distributions to its Austrian parent company. To prevent a tax-neutral repatriation of the foreign subsidiary s accumulated profits via a cross-border merger, an amendment to the Austrian Reorganisation Tax Act was introduced in Under this new regulation, a (taxable) constructive dividend is assumed in case a foreign subsidiary falling within the scope of the switch-over provision is merged (up-stream) into its Austrian parent company. In essence, this means that the subsidiary s retained earnings become taxable in Austria (25% corporate income tax rate). A credit of underlying foreign taxes may be available. According to proposed legislation (Tax Amendment Act 2012), the scope of this provision is to be extended generally to any type of intra-group mergers (in particular to side-stream mergers). In addition, it will be clarified that capital previously paid in by the shareholders to the foreign subsidiary (shareholder contributions) will qualify as a tax-neutral repayment of capital and therefore not be treated as (taxable) constructive dividend. Sufficient evidence will have to be kept in order to demonstrate the nature of the repatriation proceeds. The amendments are intended to become effective for all mergers whose entries into the commercial register are applied for after 31 October Amendments to the deductibility of donations Donations to certain charitable organisations are deductible in Austria. The deductibility of such donations is, however, limited to 10% of the income of the preceding year. Under the Tax Amendment Act 2012, the limitation is to refer to the current year s income. This rule is applicable as of t.schneider@at.pwc.com marlies.steindl@at.pwc.com

4 Inter-company share deals Constitutional Court confirms restrictions on interest deductibility According to general Austrian tax principles, any expenses directly attributable to the generation of tax-exempt income are not tax-deductible. Up to 2005, this resulted in the general non-deductibility of interest expenses incurred upon the debt-financed acquisition of shareholdings if the dividend income was exempt under the Austrian participation exemption regime. With effect from 2005 onwards, the Austrian legislator introduced the general deductibility of interest incurred upon the debt-financed acquisition of shareholdings in order to promote Austria s position as a holding location. Therefore, interest incurred as a result of loans being taken up to finance the acquisition of a resident or non-resident subsidiary is tax deductible, even if the dividends received from this shareholding are tax-exempt. Following the implementation of this new rule, the Austrian tax administration observed several cases where the Austrian tax base was eroded by the debt-financed acquisition of shareholdings from related parties. With effect from 1 January 2011, the Austrian legislator therefore restricted the deductibility of interest expenses to third party acquisitions. As this provision also applied retroactively to interest expenses incurred after 1 January 2011 even if the intercompany acquisition took place before 2011, considerable concerns about the conformity with Austrian constitutional law were raised within the Austrian tax community. Recently, the Austrian Constitutional Court ( Verfassungsgerichtshof ) has confirmed that the newly introduced restriction on the deductibility of interest in case of an inter-company acquisition of shares does not violate Austrian constitutional law and is thus legally effective. t.schneider@at.pwc.com marlies.steindl@at.pwc.com Austrian tax group regime: Sandwich tax groups allowed by Austrian Ministry of Finance The ECJ s Papillon Case Papillon held 100% of a Dutch subsidiary, which in turn held shares in a French sub-subsidiary. Papillon opted for the tax integration regime, taking over sole liability for the corporate income tax of the whole group s results. Papillon included in the tax group its French sub-subsidiary and a number of subsidiaries of that company. The tax authorities refused the application of the tax group regime to Papillon as the French sub-subsidiaries were held indirectly through a Dutch company. The ECJ ruled that the freedom of establishment precludes any legislation of a Member State which allows that a group tax regime is made available to a parent company resident in this Member State and holding subsidiaries and sub-subsidiaries inthe same jurisdiction, but excludes a parent company if its resident sub-subsidiaries are held through a subsidiary resident in another Member State from this group tax regime (C-418/07). The Austrian legal position The Austrian group taxation regime is very similar to the French one. According to the Austrian Corporate Income Tax Act, lower tier subsidiaries held by foreign group members may not be included in the group taxation regime even if the lower tier subsidiaries are Austrian companies. Interpretation of the Austrian Ministry of Finance On 16 May 2012, the Austrian Ministry of Finance released a formal note concerning an EU compliant interpretation of the Austrian Corporate Income Tax Act. Consequently, the results of an Austrian subsidiary held by a foreign group member can from now on be considered in an Austrian tax group. However, the Austrian tier subsidiary may not be qualified as a fully fledged member of the tax group: Any subsidiaries held by this Austrian group member may not be included in the tax group. Tax effective current-value depreciations in this Austrian group member are not allowed. Tax goodwill amortisations in the shares in this Austrian lower tier subsidiary are not allowed. kerstin.kneidinger@at.pwc.com alexander.wagner@at.pwc.com

5 Domestic income of a profitable foreign group member The Austrian Independent Fiscal Senate (first legal instance; UFS) released a decision on the direct attribution of domestic income of a non-resident group member to the Austrian group leader. The decision related to the question of whether it was possible to directly attribute the domestic results of a profitable foreign group member to the group leader from a national and EU law perspective. Background A profitable German subsidiary of an Austrian tax group leader exclusively generates income from leasing out real estate in Austria via a permanent establishment. The Austrian tax authorities assessed the local income as earnings of the German group member since according to the wording of Article 9(6)Austrian Corporate Tax Act (CTA) only losses of foreign group members are considered within the Austrian tax group. The German group company appealed against the assessment of income and claimed that the Austrian income had to be treated as group income and therefore be attributed to and taxed at the level of the Austrian group leader. The appeal was based on complementary statements issued by the government during the Austrian Tax Reform Act of 2005 (which were not in line with the wording of the final provisions) and on EU law arguments. Decision According to the legislator s complementary statements issued during the Austrian Tax Reform Act 2005, the direct attribution of operating results of a domestic permanent establishment of a foreign group member to the Austrian group leader should be possible in any case and not be limited to a loss position of the foreign group member. Therefore, pursuant to the appellant s argumentation, the appropriate interpretation of the Austrian tax group regulations results in the attribution of the above mentioned PE results to the Austrian group leader. The appellant furthermore refers to the judgement in the ECJ Papillon case (C-418/07), in which the ECJ overruled French provisions on group taxation and allowed the attribution of results in a Sandwich case. The appellant claims that the interpretation of the Austrian tax group regulations as made by tax authorities is therefore not in compliance with EU law. The arguments of the appellant were dismissed by the UFS. The UFS argued that the complementary statements brought forward by the appellant did not justify the displacement of Article 9(6) CTA. The mentioned provision clearly only allows the direct attribution of losses of the nonresident group member to the Austrian group leader. The UFS furthermore pointed out that the findings of the Papillon case were overruled by the ECJ s decision on X-Holding BV (C- 337/08). Following the X-Holding BV case, the UFS does not see a general obligation to accept the direct attribution of domestic PE results of a tax non-resident to the group leader. Therefore, local results generated via a domestic PE will be taxed and assessed unchanged at the level of the non-resident group member insofar as the group member is in a profit situation. Preview The UFS decision can be regarded as questionable. In the pending ECJ case of Phillips Electronics (C-18/11), General Advocate Kokott notes that the discrimination of results of the domestic permanent establishment of a non-resident group member in comparison to a tax resident group company is not in compliance with EU law. In the given case, the German group company appealed to the Administrative High Court. Whether the Administrative High Court requests a preliminary ruling of the ECJ or not remains to be seen. richard.jerabek@at.pwc.com daniel.stoephasius@at.pwc.com

6 Controversial decisions of the Independent Fiscal Senate regarding retroactive contributions Legal situation According to the Austrian Reorganisation Tax Act ( ARTA ), qualified assets can be contributed in a tax neutral manner to a corporation if certain conditions are met. Such transactions can be carried out retroactively, i.e. the contribution becomes effective for income tax purposes as of a certain due date in the past ( retroactive effect ). Here the question arises whether it is possible to contribute assets to a corporation which was founded after the contribution due date. The guidelines of the fiscal authorities, existing case law and the relevant specialists literature all agree that assets can be contributed to a corporation which did not exist at the due date of the contribution. Decisions of the UFS In the cases at hand, the Independent Fiscal Senate ( UFS ) decided that it was impossible to make a contribution to a company which did not exist as at the contribution due date. This results from the fact that the company could not take over assets from a civil law perspective at this point in time. Consequently, an obligatory condition for the application of the ARTA the actual transfer of assets was not fulfilled and the contribution therefore was not regarded as a tax neutral transaction. The decisions are pending with the Administrative High Court (AHC). Review The decisions of the UFS are contrary to the previous case law of the AHC, current administrative practise and the opinions of tax specialists. Therefore, the decisions do not appear to be representative. This position has also been taken by the Ministry of Finance, which has informed the Chamber of Certified Accountants that administrative practise will remain unchanged, unless the AHC approves the opinion of the UFS. Should this be the case, the financial authorities would apply the AHC s decision only to contributions with due dates after the date of the (currently pending) AHC decision. Consequently, contributions made to corporations founded after the contribution due date should still be possible. However, until the case has been decided by the AHC, a moderate risk remains with respect to such transactions. richard.jerabek@at.pwc.com ulrike.koller@at.pwc.com Cross-border tax treatment of carried interest The Austrian Ministry of Finance commented in a recent letter ruling on the tax treatment of carried interest in a cross-border situation with Germany. Austrian individuals and a German limited liability company (GmbH) held a participation in a German limited partnership (KG). The limited partnership held several participations in non-listed companies and derived dividend and capital gains income thereof. For tax purposes, limited partnerships are treated as transparent in Austria and Germany. Therefore, the partnership s income is allocated on a pro rata basis to the partners and taxed at partner level at their individual tax rate according to the type of income. Dividend and capital gains income of individuals is taxed at a flat rate of 25% and related expenses are non-deductible. The limited partnership does not qualify as a permanent establishment under the Double Tax Treaty Austria-Germany ( DTT ), as it is not involved in any trading activities. Therefore, the limited partnership is ignored and any income from the investments is deemed to be derived directly by the partnership s partners. Pursuant to the DTT, Austria has the right to tax such dividend and capital gains income in this case. In the current case, the German GmbH was rendering management services to the limited partnership in return for an increased share in the limited partnership s profits ( carried interest ). According to the Austrian Ministry of Finance, this carried interest could not be treated as an expense and the carried interest payment was solely a reallocation of the profit share derived from the limited partnership. The Austrian partners profit share was decreased in order to increase the profit allocated to the GmbH. g.karatas@at.pwc.com mathias.knittel@at.pwc.com

7 Liquidation of a German corporation s Austrian subsidiary The Austrian Ministry of Finance comments on the tax treatment of retained earnings, transferred by an Austrian subsidiary in liquidation to its German parent company. In Austria, the termination of a corporation, by a liquidation is treated as a sale and constitutes a taxable event for the shareholder. In the course of a liquidation, shareholders give up their shares in the corporation in return for a pro rata share of the liquidation proceeds. The liquidation proceeds consist of all assets (revaluated at fair market value) and liabilities less nominal capital and surplus. In general, foreign shareholders of an Austrian corporation are subject to a capital gains taxation of 25% on positive liquidation proceeds unless an exemption applies. In a recent short letter ruling, the Austrian Ministry of Finance commented on the treatment of retained earnings which are distributed as part of the liquidation proceeds in the course of a liquidation. A German corporation liquidated its Austrian subsidiary, which disposed of retained earnings. In the current case, Article 10 of the Double Tax Treaty Austria-Germany, which stipulates the treatment of dividends, did not apply. In the view of the Austrian Ministry of Finance, there was no pro rata dividend distribution to the German parent company. Instead, retained earnings were covered as part of the liquidation proceeds by Article 13 Double Tax Treaty Austria-Germany ( capital gains ). Following Article 13, only Germany has the right to tax liquidation proceeds derived from the liquidation of an Austrian corporation. Austria has to exempt such income. Therefore, no Austrian tax fell due and no withholding tax had to be withheld. g.karatas@at.pwc.com mathias.knittel@at.pwc.com Indirect Taxes Refund of Austrian energy tax: exclusion of service providers as of February 2011 Application for refund of energy tax limited to manufacturers The Austrian Ancillary Budget Act 2011 ( Budgetbegleitgesetz 2011 ) provided for a limitation of the group of applicants entitled to apply for a refund of Austrian energy tax. As of 1 January 2011, only manufacturers are entitled to apply for a refund of Austrian energy taxes whereas service providers are excluded from the refund procedure. According to the Ancillary Budget Act 2011, manufacturers are entitled to a refund of energy tax if their main business purpose is the production of tangible assets. As the limitation of the group of applicants might qualify as aid granted by a Member State, which would basically be incompatible with the internal market, the limitation required the approval of the European Commission. Restriction of entitled applicants approved by European Commission The approval of the law amendment has recently been granted by the European Commission. For the period from 1 February 2011 to 31 December 2013 only manufacturers are entitled to apply for a refund of Austrian energy taxes (Official Journal of the European Union, C-288, 20 et seq.). Austrian energy taxes refunded proportionally The last time service providers may apply for a refund of Austrian energy tax is for the period ending 31 January For the following periods, the application is limited to manufacturers. If a service provider has for example the balance sheet date of 31 December, he may apply for a refund for the last time with respect to the short period of January The calculation of the refund amount is based on the revenues, payments and energy obtained for this period only. Additionally, also the general deduction of 400 may only be considered proportionally. Author: alexander.wagner@at.pwc.com

8 Austrian Tax Facts and Figures Taxation of corporations Corporate income tax rate (Basis adjusted statutory accounts) 25% Non-deductible expenses (examples) Dividend withholding tax 25% Long-term accruals 20% Witholding tax on licences/royalties 20% Business meals 50% Interest witholding tax 0% Excessive car expenses for luxury cars Significant allowances Research & Development (R&D) (premium in cash) 10% Learning & Education (L&E) (Alternatively premiums in cash: 6%) up to 20% Double taxation agreements with 83 countries mainly exemption method International participation exemption for holding companies Conditions: Investments >10%, 1 year holding Dividends and Capital gains 0% Dividend EC portfolio (shares) < 10% 0% Thin capitalization rules None CFC rules None Tax loss carry forwards Losses may be carried forward for an indefinite period of time Usage of tax losses: 75% of taxable income Group taxation valid from January 2005 Consolidation of tax losses with taxable profits Conditions: Qualifying participations > 50% Group agreement and agreement on allocation of cost Losses of foreign participations may be offset against profits of group leader Annual taxable Income Tax Effective Tax Marginal Tax Rate to 11, % 0% over 11,000 to 25,000 over 25,000 to 60,000 Value added tax in line with the 6 th EU directive (EK - 11,000) x 5,110 14,000 (EK - 25,000) x 15,125 35,000 Standard rate 20% Reduced rate (Food, rent, public transportation etc.) 10% VAT refund for foreign enterprises available up to June 30 of the following year and for EU enterprises up to September 30 of the following year. Other taxes Real estate transfer tax 3.5% Capital tax 1.0% Stamp duties - Assignment agreements 0.8% - Rent agreements - Suretyship agreements % 36.50% + 5, % 43.21% over 60,000 (EK - 60,000) x 50% + 20,235 > 33.73% 50% Social security on monthly earnings up to Employer s share up to 21.83% Payroll related taxes approx. 8.0% Employee s share up to 18.07% Income cap for social security contributions, social security totalisation agreements with various states 1.0% 1.0% Contacts PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft Erdbergstraße 200, 1030 Vienna Austria Tel Tax Partners and Directors: Monika Berndl ext Ernst Biebl ext Doris Bramo-Hackel ext Alexandra Dolezel ext Marianna Dozsa ext Peter Draxler ext Margit Frank ext Herbert Greinecker ext Bernd Hofmann ext Martin Jann ext Matthias Kornberger ext Rudolf Krickl ext Kurt Lassacher ext Erik Malle ext Peter Perktold ext Friedrich Rödler ext Maria Schachner ext Thomas Steinbauer ext Thomas Strobach ext Christine Weinzierl ext Rupert Wiesinger ext Christof Wörndl ext Georg Zehetmayer ext ) ext. 2) ext. We encourage feedback on the newsletter and the content. Equally, we welcome any of your thoughts on topics that you would like to see addressed in future issues. Visit our website for archived Austrian Tax News: Copyright and Publisher: PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft, Erdbergstraße 200, 1030 Vienna, Austria Editor: Christof Wörndl, christof.woerndl@at.pwc.com The above information is intended to provide general guidance only. It should not be used as a substitute for professional advice or as the basis for decisions or actions without prior consultation with your advisors. While every care has been taken in the preparation of the publication, no liability is accepted for any statement, option, error or omission. PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.