Austria A perfect gateway between East and West

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1 Austria A perfect gateway between East and West Erich Certified Baier, Tax MBA, Advisor LL.M. 1 / 58 1 /77

2 Austria A A perfect gateway between East East and and West Wie auch immer das ausschauen 25 th Anniversary soll Corporate Tax Advisory Excellence in Austria 2010 to Years Bilanz-Data Lawyers World Global Erich Award Baier, Winner MBA, 2011 LL.M. TEP 2 / 58

3 A few words about our tax law firm Certified Tax Law and Accounting Firm based in Vienna Services for our clients include Corporate services book keeping payroll accounting annual accounts and tax returns Establishing and maintaining Holding companies Trading companies Private Foundations Providing nominee directors and nominee shareholders Domicilation services Tax planning for individuals and corporations Tax litigation Corporate reorganizations Obtaining tax rulings VAT matters 3 / 58

4 Why Austria? Reputable jurisdiction no off-shore flavor EU Member State since 1995 ALL EU Directives accessable 64 Investment Protection Agreements with other countries 90 Double Taxation Treaties with other countries Austria is located right in the center of Europe all major cities in Europe can be reached within a flying time of not more than three hours stable economy with perfect infrastructure 4 / 58

5 Why Austria? NO inheritance tax NO gift tax NO net wealth tax NO debt / equity ratios NO thin cap rules NO duties levied upon loans NO withholding tax levied upon interest payments to domestic or foreign lenders (also in case of lenders in non-treaty or off-shore countries) 5 / 58

6 Why Austria? Tax treaty network Currently 90 tax treaties Among others with: Under negotiation: Panama Mauritius Bahrain Barbados Belize Cyprus Liechtenstein Hong Kong Luxembourg Malta San Marino Switzerland Singapore UAE 6 / 58

7 Austria - a perfect hub for investments into Europe and Africa Located at the gateway between East and West Currently 90 Double Taxation Treaties with other countries Currently 64 Investment Protection Agreements with other countries protecting against expropriation Member of the EU since 1995 NO CFC legislation => access to all EU Directives => NO w/t on dividends from / to EU companies Foreign source dividends and capital gains tax exempt Foreign source partnership / pe (permanent establishment) income tax exempt Foreign source losses from subsidiaries / pe s tax deductible in Austria 7 / 58

8 Austria - a perfect hub for investments into Europe and Africa Colombia Belgium Bulgaria Belarus China Norway Denmark Turkey France Germany Italy Poland Portugal South Africa Kazakhstan Morocco withholding tax 8 / 58

9 Austria - a perfect hub for investments into Europe and Africa Provided that each subsidiary is distributing the tax burden at source is: w/t % w/t Belgium Bulgaria Belarus China Norway Denmark Turkey France Germany Italy Poland Portugal South Africa Kazakhstan Morocco total taxes / 58

10 Colombia Austria - a perfect hub for investments into Europe and Africa Austria Interposing an Austrian GmbH significantly reduces the tax burden at source Belgium Bulgaria Belarus China Norway Denmark Turkey France Germany Italy Poland Portugal South Africa Kazakhstan Morocco withholding tax 10 / 58

11 Austria - a perfect hub for investments into Europe and Africa By using an Austrian company the tax burden at source (withholding tax) can be reduced significantly w/t % w/t Belgium 0 0 Bulgaria 0 0 Belarus China Norway 0 0 Denmark 0 0 France 0 0 Germany 0 0 Italy 0 0 Poland 0 0 Portugal 0 0 South Africa Kazakhstan Turkey Morocco total taxes before annual tax saving %!! 11 / 58

12 Tax treatment of foreign partnership income Austria non-treaty country Austrian GmbH partnership/ permanent establishment tax rate 15 % or more profits: losses: tax exempt in Austria tax deductible in Austria treaty country non-treaty country partnership/ permanent establishment partnership/ permanent establishment tax rate below 15 % profits: tax exempt x) in Austria profits: taxable in Austria (ftc granted) losses: tax deductible in Austria losses: tax deductible in Austria x) regardless whether taxes are levied in the other country or not 12 / 58

13 Key features of the Austrian Holding Foreign Holdings Minimum holding period: 1 year Scenario A: Shareholding less than 10 % (portfolio investments) Foreign corporate tax 15 % or more tax-free dividends tax-free capital gains less than 15 % dividends and capital gains taxable BUT foreign tax credit for foreign corporate tax foreign withholding tax Foreign corporate tax can be carried forward unlimited! 13 / 58

14 Key features of the Austrian Holding Foreign Holdings Scenario B: Shareholding more than 10 % Leads to tax-free dividends and tax-free capital gains Regardless whether foreign subsidiary is taxed or not! 14 / 58

15 Key features of the Austrian Holding Foreign Holdings Meeting these aforementioned conditions leads to tax exempt dividends tax exempt capital gains NO treaty necessary subsidiary can be off-shore subsidiary can be tax exempt losses of foreign subsidiaries or foreign permanent establishments tax deductible in Austria NO thin-cap or debt-equity rules NO w/t on interest paid to non-resident lenders even if off-shore 15 / 58

16 Key features of the Austrian Holding Example: Austrian Holding Dividends and capital gains are TAX EXEMPT BVI Ltd Cayman Islands Ltd. Panama Vanuatu Ltd. rental income local tax: 0 African factory consulting income local tax: 0 runs a hotel local tax: 0 active income local tax: 0 16 / 58

17 Key features of the Austrian Holding The tax treaties with the following non-eu countries foresee a 0 % w/t on dividends distributed by an Austrian corporation to its foreign shareholders Bahrain Croatia Georgia Hong Kong Kuwait Macedonia Norway Qatar San Marino Singapore Switzerland Tajikistan Turkmenistan United Arab Emirates 17 / 58

18 The unrivaled Austrian Private Foundation 18 / 58

19 The Austrian Private Foundation In 1993 the Austrian Private Foundation was written into law Was designed to preserve and create wealth for the benefit of a family Turned out to be an overwhelming success because of high flexibility material tax benefits utmost of privacy 19 / 58

20 The Austrian Private Foundation Seal of Quality In 2011 this unique and outstanding position of an Austrian Private Foundation has been confirmed by an absolutely neutral authority 20 / 58

21 The Austrian Private Foundation Canadian Tax Court Decision Sommerer v. The Queen, 2011 TCC 212 Docket: (IT) G Tax Court of Canada held that an Austrian Private Foundation is NOT transparent Austrian Foundation is beneficial owner of income achieved income is not taxable in the hands of settlors or beneficiaries 21 / 58

22 Austrian Private Foundation 0 % corporate tax! 10 % or more holding period 1 year NO minimum percentage NO minimum holding period less than 10 % any third country EU / EEA countries any third country dividends foreign tax 15 % or more 22 / 58

23 The Austrian Private Foundation Otherwise Dividends subject to 25% interim tax BUT Foreign tax is credited against Austrian tax Interim tax is reimbursed (!) when foundation is revoked 23 / 58

24 The Austrian Private Foundation Taxation of current income Normally subject to the statutory corporate tax rate of 25 % (flat rate) But the following tax exemptions make it a perfect tool for families and their business: NO TAX on domestic or foreign dividends NO TAX on the sale of domestic or foreign shares (roll over relief) 25 % TAX on domestic or foreign interest income BUT this tax can be avoided legally is reimbursed to the foundation in case of payments to beneficiaries NO INHERITANCE TAX when the foundation is revoked when settlor / founder dies 24 / 58

25 The Austrian Private Foundation Beneficiary Payments to beneficiaries resident in Austria subject to 25 % final withholding tax Payments to non-resident beneficiaries: 0 % w/t ( e.g. Russia ) Only a few treaties allocate the right to levy a w/t to Austria Such a w/t is credited against the income tax of the non-resident beneficiary 25 / 58

26 Case Studies 26 / 58

27 Protect your privacy become silent partner Mr S wants to make investments into real estate But he does not want to have his name disclosed in the land cataster And he looks for an utmost of tax efficiency regarding two aspects low income tax burden double tax treaties shall apply when real estate is sold 27 / 58

28 Protect your privacy become silent partner The solution Mr S silent partner GmbH 100 % annual profit foreign company 100 % Mr S is entitled to 90 % of the income achieved by the GmbH 100 % dividends received from foreign company TAX EXEMPT in the hands of Austrian GmbH sale of shares in foreign company TAX EXEMPT in the hands of Austrian annual profit GmbH 28 / 58

29 Protect your privacy become silent partner Calculation of Austrian tax base taxable tax exempt profit domestic real estate profit share Mr. S (90 %) NO w/t foreign dividends profit share Mr. S (90 %) NO w/t tax base tax (25 %) 50 0! effective tax bracket (50 / 5.000) 1 %!! 29 / 58

30 Tax-free sale of shares Mr S holds shares in an off-shore company which holds shares in a Spanish Ltda which runs a hotel Mr S got an offer from a large group to sell the hotel for 20.0 m The net asset value of the Ltda is 10.0 m What are the tax consequences of such a sale? 30 / 58

31 Mr S A) The Spanish Ltda sells the hotel off-shore 100 % => this would expose the capital gain to 30 % tax the Spanish Ltda has to pay => Distributing the net profit to the off-shore triggers additional 21 % tax Spanish Ltda 100 % capital gain (20.0 m 10.0 m) tax 30 % net profit % withholding tax sale of hotel net proceeds effective tax burden 44,7 % Hotel Hotel Corp 31 / 58

32 Mr S B) The off-shore sells Spanish Ltda off-shore 100 % sale of Ltda shares This triggers a 21 % tax in Spain levied upon the capital gain of 10.0 m => of taxes coming due Problem: Spanish Ltda 100 % Hotel Hotel Corp Hotel Corp does not want to buy from an offshore company Payments to off-shores might get challenged by the tax authorities in country of Hotel Corp 32 / 58

33 Mr S off-shore Spanish Ltda sale of off-shore shares 100 % 100 % Hotel Corp C) Mr S sells the shares of the off-shore Seems to be the best solution Mr S has to pay only 15 % income tax on the capital gain BUT: Hotel Corp does not want to buy an off-shore entity Is there a way out? Can we solve the problem? Hotel 33 / 58

34 YES, WE CAN! (Not only Obama) Mr S 100 % The off-shore Ltd enters into a silent partnership deed with an Austrian GmbH and contributes the shares of the Spanish Ltda as a consideration for the right to participate in the profits of the Austrian off-shore 100 % silent partner Austrian GmbH 100 % GmbH Which tax impacts do we have to face? Spanish Ltda Spanish Ltda Hotel Hotel 34 / 58

35 Tax-free sale of shares The contribution of the Spanish shares is done at nominal value; i.e. the value of the consideration (= silent partnership) is equal to the intially paid in share capital of the Spanish company => transaction does not trigger taxes off-shore 100 % silent partnership value: Austrian GmbH Spanish Ltda paid in share capital: / 58

36 Tax-free sale of shares The Austrian GmbH is entitled by law to make a tax-free step-up in basis => Austrian GmbH can reflect the fair market value of the Spanish shares in its balance sheet FREE OF ANY TAXES before after bank capital Sp. shares capital free cap. res bank silent partner / 58

37 Tax-free sale of shares When the Austrian GmbH sells the Spanish shares to Hotel Corp the tax base is calculated as follows: sale of shares book value tax base 0 tax 0!! According to the treaty with Spain only Austria has the right to tax such capital gains Payment of profit share to off-shore does not trigger any withholding tax TRANSACTION IS TOTALLY TAX-FREE! 37 / 58

38 Benefits of an Austrian Silent Partnership The benefits of an Austrian Silent Partnership are evident Providing an utmost of privacy Allows cross-border transactions either totally tax exempt or with an neglectable tax burden No reinvention of the wheel but using Austrian law existing more than 200 years Extreme flexibility Easy to set-up, easy to close down 38 / 58

39 Don t sell but split off! Capital gains resulting from the sale of shares in foreign corporations usually taxable in the country where the selling corporation has its seat Corp A Corp B taxable in country A sale of shares in Corp B 39 / 58

40 Don t sell but split off! Quite a large number of tax treaties foresee that if the majority of the assets of Corp B consists of real estate the right to levy taxes on such a capital gain stays in country B Corp A Corp B sale of shares in Corp B taxable in country B If country A exempts such capital gains from tax there is no possibility to claim a foreign tax credit against a domestic tax burden in country A 40 / 58

41 Don t sell but split off! An Austrian GmbH (company with limited liability) is holding shares in a Chinese company and holds shares in a real estate company in Romania which achieves rental income An investor wants to buy this real estate company in Romania from the Austrian GmbH According to the tax treaty between Romania and Austria Romania has the right to tax these capital gains achieved by the Austrian GmbH According to domestic Austrian tax law such capital gains are tax exempt in Austria 41 / 58

42 Austria Romania investor 100 % Romanian company rental income Mr. A 100 % Austrian GmbH 100 % Chinese company Investor wants to buy Romanian real estate company from Austrian GmbH Sale of shares of real estate company would trigger taxation in Romania Since capital gains are tax exempt in Austria NO foreign tax credit possible 42 / 58

43 How to avoid taxation in Romania? Possible? 1. Investor increases share capital of Austrian GmbH 2. Austrian GmbH splits-off the shares of the real estate company into an Austrian NEWCO and distributes the NEWCO shares to the investor 3. Acquisition price remains in old Austrian GmbH TAX EXEMPT 43 / 58

44 Mr. A investor Mr. A investor 50 % 50 % 50 % 50 % Austrian GmbH Austrian GmbH 100 % Austrian NEWCO Romanian company Chinese company Romanian company Chinese company Romanian company rental income rental income rental income 44 / 58

45 Mr. A investor 100 % 100 % Austrian GmbH Austrian NEWCO Chinese company => whole transaction is tax exempt both in Romania and Austria Romanian company rental income 45 / 58

46 How to avoid inheritance tax and withholding taxes at the same time Mr. A, a successful entrepreneur, owns a prosperous company in France holds shares in a Spanish hotel company has acquired a German real estate company and holds a large bank account in Austria The value of these assets is: company in France company in Spain apartment building in Germany bank account in Austria / 58

47 How to avoid inheritance tax and withholding taxes at the same time Mr A is married and has two grown up children, a daughter and as son He has foreseen that his family should inherit all his assets In his country NO inheritance tax is levied BUT a few weeks ago he met an Austrian tax lawyer who made him aware about that in other countries inheritance tax will come due!! 47 / 58

48 How to avoid inheritance tax and withholding taxes at the same time The following inheritance taxes would be levied in the countries where Mr A holds assets: country value of assets tax bracket inheritance tax France % Spain % Germany % Austria % Such a tax burden would do significant harm to his assets and he looks for an alternative to legally avoid such a tax burden 48 / 58

49 How to avoid inheritance tax and withholding taxes at the same time Solution An Austrian Private Foundation in combination with an Austrian Holding is a perfect instrument to avoid legally any inheritance tax and withholding taxes Step # 1: Mr A establishes an Austrian foundation and an Austrian GmbH At the same time he uses his bank deposit in Austria to establish an off-shore company with a share capital of / 58

50 How to avoid inheritance tax and withholding taxes at the same time Step # 2: Instantly afterwards he contributes his French, Spanish and German shares to the share capital of the Austrian GmbH in exchange for new shares in the Austrian GmbH by increasing the share capital of the Austrian GmbH with an amount equal to the paid in share capital of the other companies Before After France Austria Spain Germany France Austria Spain Germany This transaction is tax neutral in all countries involved 50 / 58

51 How to avoid inheritance tax and withholding taxes at the same time Step # 3: Afterwards he gifts the shares of the Austrian GmbH to the foundation and sells the shares of the off-shore to the Austrian foundation Austrian foundation claim 1.8 m Mr A settlor and beneficiary Austrian GmbH 100 % off-shore bank deposit 1.8 m France Spain Germany Bank 51 / 58

52 How to avoid inheritance tax and withholding taxes at the same time Tax impacts Claims against foundation Having sold his off-shore shares to the foundation for 1.8 m entitles him to receive this amount from the foundation TAX-FREE (NO w/t, NO income tax) Endowing the Austrian GmbH shares to the foundation triggers a ONE-TIME 2.5 % tax 2.5 % of (value of shares in G, F, E) 52 / 58

53 How to avoid inheritance tax and withholding taxes at the same time Tax impacts Inheritance tax in Germany, France and Spain Because the shares in the German, French and Spanish companies are now owned by the Austrian GmbH which is owned by the Austrian foundation NO INHERITANCE TAX comes due when Mr A dies and his family members become beneficiaries of the foundation TAX SAVING 100 % !! 53 / 58

54 How to avoid inheritance tax and withholding taxes at the same time Additional benefit of the structure Dividends distributed by the foreign corporations are subject to withholding taxes at source Individual Austrian GmbH dividends w/t tax w/t tax per year Germany % % 0 France % % 0 Spain % % 0 total TAX SAVING %!! 54 / 58

55 How to avoid inheritance tax and withholding taxes at the same time Using the Austrian structure completely eliminates inheritance tax and all withholding taxes ANNUAL TAX SAVING ! INHERITANCE TAX SAVING ! Mr A 0 % w/t Austrian foundation 0 % income tax 100 % 0 % w/t Austrian GmbH 0 % income tax off-shore 0 % income tax 100 % 0 % w/t 0 % w/t 0 % w/t dividend flow France Spain Germany interest income bank deposit 55 / 58

56 Together with a generally friendly tax climate in Austria the Austrian Holding and the Austrian Private Foundation are perfect tools for Sharia compliant structures dynastic wealth planning managing wealth tax-free preserving assets to a family obtaining off-shore income tax-free avoiding capital gains tax income tax inheritance tax 56 / 58

57 Go the Austrian way - it really pays off!! Tax Law and Accounting Office Schwarzenbergstraße 1-3/14a, 1010 Vienna, Austria Phone: (**43 1) x 0, Fax: (**43 1) x 14 baier@austrian-taxes.com Your link to Austrian tax law 57 / 58

58 THANK YOU FOR YOUR ATTENTION! 58 / 58