Two or more companies can form a tax group, provided the parent company directly or indirectly owns more than 50% of the shares in the subsidiaries. The tax group also can include foreign group members. However, the scope of foreign tax group members is limited to corporations being resident in EU member states and in states that have entered into a comprehensive administrative assistance arrangement with Austria. If a group member withdraws from the group within a minimum commitment-period of three years, all tax effects derived from its group membership must be reversed.
Within a tax group, all of the taxable results (profit and loss) of the domestic group members are attributed to their respective group parent. In case of foreign tax group members, tax losses in the proportion of the shareholding quota are attributed to the tax group parent. The foreign tax loss has to be calculated in accordance with Austrian tax law. However, it is capped with the amount actually suffered based on foreign tax law. Starting in 2015, ongoing tax losses from foreign group members can only be recognised to the extent of 75% of the profit of all domestic group members (including the group leader). The remaining loss surplus may be carried forward by the group parent. In addition, foreign tax losses utilised by the Austrian tax group parent are subject to recapture taxation at the time they are (or could be) utilised by the tax group member in the source state, or at the moment the group member withdraws from the Austrian tax group. Under the recapture taxation scheme, the Austrian tax group has to increase its Austrian tax base by the amount of foreign tax losses used in prior periods (“recapture profit”). There is an exception from this principle only for situations where the foreign group member ceases to exist because of liquidation or insolvency. In such scenarios the recapture profit can be reduced by former depreciations (which were treated non deductible because of the status as a group member, see below) down to zero.
For the purpose of the application of the recapture taxation scheme, a withdrawal from the tax group is also assumed if the foreign group member significantly reduces the size of its business (compared to the size of the business at the time the losses arose). Reduction of size is measured on the basis of business parameters such as turnover, assets, balance sheet totals, and employees, while the importance of the respective criteria depends on the nature of the particular business.
Under the previous tax group regime, goodwill that arose in the course of a share deal (acquisition of an Austrian active business company from a third party contractor) had to be amortised over 15 years, provided that the acquired company was included in a tax group. Goodwill amortisations have now been abolished and are applicable only for share deals effected until 28 February 2014. Existing goodwill amortisations are grandfathered, provided the goodwill amortisation potentially impacted the share purchase price.
Note that in 2015 the European Court of Justice (ECJ) qualified the limitation of the goodwill amortisation to Austrian target companies as not being in line with EU law (case C-66/14, Finanzamt Linz). The VwGH followed the decision of the ECJ with its decision of 10 February 2016 (case 2015/15/0001).
Consequently, the acquisition of non-Austrian EU target companies basically qualifies for goodwill amortisation. However, the decision of the VwGH only has an impact on share deals that were made before 1 March 2014.
Write-downs of participations in tax group members are not tax deductible.
Under Austrian Tax Law, there are no explicit transfer pricing regulations available defining, in detail, the local requirements with regards to arm’s length, the documentation standards required, penalties, etc. In general, Austria applies the OECD transfer pricing guidelines referring to the OECD model tax convention. Furthermore, Austrian transfer pricing guidelines have been issued by Austrian tax authorities. The guidelines represent the Austrian authority’s understanding of inter-company business relationships with regards to their arm’s-length classification and are based on the OECD transfer pricing guidelines.
According to these guidelines, all business transactions between affiliated companies must be carried out under consideration of the arm’s-length principle. Where a legal transaction is deemed not to correspond to arm’s-length principles, the transaction price is adjusted for CIT purposes. Such an adjustment constitutes either a constructive dividend or a capital contribution. Currently, there is the option of applying for a non-binding ruling of the tax authorities. Additionally, an advanced ruling opportunity is available. Under this regulation, binding information in the fields of transfer pricing, group taxation, and mergers and acquisitions (M&A) can be requested from the Austrian tax authorities against payment of an administrative fee (the fee rate depends on the size of the applicant’s business).
On 14 July 2016, the Austrian Parliament enacted the European Union Tax Amendment Act 2016 (‘EU-Abgabenänderungsgesetz 2016’), including new mandatory transfer pricing documentation requirements (‘Verrechnungspreisdokumentationsgesetz’ [VPDG]) as defined in Action 13 of the OECD’s Action Plan on Base Erosion and Profit Shifting. The European Union Tax Amendment Act 2016 was announced in the Austrian Federal Law Gazette on 1 August 2016.
The VPDG follows a three-tiered documentation approach, requiring the preparation of a Master File, a Local File, and a Country-by-Country (CbC) Report, and is effective for fiscal years starting from 1 January 2016 onwards. The entire documentation is to be prepared in either German or English.
Austrian companies with a turnover above EUR 50 million in the two preceding fiscal years are subject to transfer pricing documentation requirements under the Master File/Local File concept. In case the consolidated group revenue of a multinational enterprise (MNE) group amounted to at least EUR 750 million in the preceding fiscal year, the ultimate parent entity, if resident in Austria, is obligated to file a CbC Report for the reporting year 2016 with the Austrian tax authorities by 31 December 2017. According to a bilateral agreement between Austria and the United States (US) as of 16 August 2018, subsidiaries of multinational groups that file a CbC report in the United States are exempt from this reporting obligation for financial years starting on or after 1 January 2017.
Further, it is possible that any Austrian business unit (i.e. basically legal entities or PEs preparing financial statements) of a qualifying foreign MNE may take over its parent's duty to report, for fiscal years beginning from 2017 onwards, in case the ultimate parent entity is not obligated to file a CbC Report in its jurisdiction of tax residence or in case no (functioning) qualifying competent authority agreement is in place with the tax jurisdiction of the ultimate parent entity that provides a basis for the exchange of the CbC Report.
There are no explicit tax regulations available under Austrian tax law stipulating the minimum equity required by a company (‘thin capitalisation rules’). Basically, group financing has to comply with general arm's-length requirements. Therefore, an Austrian group entity being financed by an affiliated entity must be able to document that it would have been able to obtain funds from third-party creditors under the same conditions as from an affiliated financing entity. Therefore, the appropriate ratio between an Austrian company's equity and debt will mainly depend on the individual situation of the company (profit expectations, market conditions, etc.) and its industry. Nonetheless, the fiscal authorities in administrative practice (i.e. no ‘safe-harbour’ rule) tend to accept a debt-to-equity ratio of approximately 3:1 to 4:1. However, the debt-to-equity ratio accepted by tax authorities also strongly depends on the average ratio relevant for the respective industry sector. If an inter-company loan is not accepted as debt for tax purposes, it is reclassified into hidden equity and related interest payments into (non-deductible) dividend distributions.
Furthermore, under Austrian commercial law, a minimum equity ratio of 8% is claimed. If the equity ratio of the company falls below 8% and its earning power (virtual period for debt redemption) at the same time does not meet certain requirements, a formal and public reorganisation process will have to be initiated.
Controlled foreign companies (CFCs)
The Annual Tax Act 2018 implementing the ATAD was published in the Austrian Federal Law Gazette on 14 August 2018 and includes the introduction of a CFC rule. The CFC rule applies to financial years beginning after 31 December 2018.
Generally, the scheme of the implemented CFC rule widely follows the wording of the ATAD. The rule covers foreign CFCs directly or indirectly owned by the Austrian corporate shareholder. Austria follows the categorical/entity approach and covers all passive income items mentioned in the directive (interest income, royalty income, dividend income, finance lease income, etc.). The CFC rule applies if the effective tax burden regarding the passive income of the foreign CFC does not exceed 12.5% (meaning that even subsidiaries in EU-countries like Cyprus, Ireland, Hungary, and Bulgaria are targeted by the rule). The scheme results in a tax-wise allocation of the low-taxed passive income item to the Austrian corporate shareholder (allowing a credit of the foreign tax levied at the level of the CFC).
With respect to the member state options included in the ATAD, Austria applied the safeguard clause (‘bona-fide clause’) also to CFCs resident or situated in third countries. Furthermore, a de-minimis exception in case the passive income of the foreign CFC is below one-third of its overall income is foreseen.
According to the Tax Reform Act 2020, the provisions against hybrids provided by the EU Directive 2017/952 (ATAD 2) were implemented in domestic law as of 1 January 2020. The wording of the domestic anti-hybrid rules strongly coincides with the wording of the ATAD.