Taxable income is determined based on statutory accounts under Austrian generally accepted accounting principles (GAAP) adjusted for certain deductions and additions prescribed by the tax law.
In general, inventories are valued at the lower of cost or market. If specific identification during stock movements is not possible, other methods, such as last in first out (LIFO) and first in first out (FIFO), are permitted when shown to be appropriate. Conformity between financial bookkeeping and tax reporting is required.
Capital gains/exit taxation/inbound transfer
Generally, capital gains (short and long-term) are part of the normal annual result of a corporation and are taxed at the ordinary CIT rate (25%).
A special tax treatment applies to capital gains with respect to the exit of taxable assets. In the case of a transfer of assets that formed part of a business from Austria to a foreign country (e.g. allocation of assets to a foreign branch), latent capital gains are generally taxed at the time of the transfer. The same is true if Austrian taxing rights regarding an asset are lost due to other circumstances. In case Austrian taxing rights are lost due to the transfer of assets to another EU/EEA member state, it is possible to apply for a payment by instalments (i.e. seven years for non-current assets and two years for current assets). Asset transfers for which the taxation has been postponed in the past (i.e. transfer after 1 January 2006) will be subsequently recaptured (e.g. when the assets are sold or transferred outside the European Union).
According to the Annual Tax Act 2018, the exit tax rules were amended. The current period for the payment of equal instalments for non-current assets was reduced from seven to five years for transfers as of 1 January 2019. Furthermore, according to the Tax Reform Act 2020, applicable as of 1 January 2020, it is possible to apply for a voluntary, premature payment of initially postponed taxes.
In case of an inbound transfer, generally, the fair market value of the assets is considered for Austrian income tax purposes (step up). Therefore, any hidden reserves accumulated abroad are not taxed in Austria.
Dividends received from an Austrian company at the corporate shareholder level are generally excluded from the tax base (no minimum stake, no minimum holding period). This tax exemption refers to domestic dividends only, not to capital gains or losses.
Additionally, dividends received from companies located within the European Union or from countries within the European Economic Area (EEA) that concluded a comprehensive agreement on mutual assistance regarding the exchange of information with Austria are also tax exempt if the foreign company is subject to a tax similar to the Austrian CIT and if the foreign CIT rate is not below 15%.
In cases where the dividends from foreign investments are taxable, foreign CIT can be credited against the Austrian CIT.
Portfolio dividends (i.e. dividends from an investment below 10%) received from corporations located in member states of the European Union, as well as dividends from corporations that are located in EEA and third countries having concluded a comprehensive agreement on mutual assistance regarding the exchange of information with Austria, are generally exempt from CIT. However, under special circumstances, a switch-over to the credit method, as outlined under International participation exemption for dividends and capital gains below, has to be considered for participations of at least 5%. Moreover, the dividend must not be deductible for tax purposes in the source state in order to be tax exempt at the level of the Austrian recipient (valid for substantial investments and portfolio dividends).
In the light of recent case law, the reimbursement of capital gains tax for portfolio dividends should also be possible for limited tax residents in third countries if a comprehensive administrative assistance agreement is in place with the country of residence (foreseen in the government bill for the Tax Amendment Act 2022).
A conversion from revenue reserves (retained earnings) to capital by a company does not lead to taxable income for the shareholder. However, capital reductions are treated as taxable income if within ten years prior to the capital reduction the above-mentioned increase in capital was repaid to the shareholder. Otherwise, they are tax exempt.
International participation exemption for dividends and capital gains
Dividends received from a foreign company are also tax exempt at the corporate shareholder level if the Austrian company holds at least 10% of the issued share capital for a minimum holding period of one year (international participation exemption). Furthermore, both capital gains and capital losses derived from shares qualifying for the international participation exemption are tax neutral. This means that a deduction of capital losses is no longer available. However, the parent company (in the tax return of the year of acquisition) can exercise an (irrevocable) option for each single participation acquired to treat both capital gains and capital losses as taxable (spread of losses and depreciations over a period of seven years). The option refers to capital gains (losses) only and does not affect the tax treatment of ongoing dividend distributions.
In the case of presumed tax abuse, the participation exemption for dividends and capital gains is replaced by a tax credit (switch-over-clause). The credit system is applied if the foreign subsidiary does not meet an active-trade-or-business test (i.e. passive income from royalties, interest, etc. is greater than 50% of total income of the subsidiary) and, at the same time, is regularly subject to a foreign income tax burden of 12.5% or below. The switch-over mechanism does not apply if the dividends have already been attributed to and taxed by the Austrian controlling parent company under the CFC regime, which is applicable for financial years starting on or after 1 January 2019. For further details, see Controlled foreign companies (CFCs) in the Group taxation section.
Interest income is taxed at the general CIT rate of 25%.
Royalty income is taxed at the general CIT rate of 25%.
Rental income is treated as normal business income.
Austrian resident corporations are taxed on their worldwide income. If a double taxation treaty (DTT) is in force, double taxation is mitigated either through an exemption or by granting a tax credit equal to the foreign WHT at the maximum (capped with the Austrian CIT incurred on the foreign-source income). If foreign WHT cannot be credited at the level of the Austrian corporation (e.g. due to a loss position), Austrian tax law does not allow a carry forward of foreign WHT to future assessment periods. However, if the source of the income is a non-treaty country, an exemption or a tax credit shall be available based on unilateral relief (representing a discretionary decision of the Austrian Ministry of Finance only, without legally entitling the applicant). Austrian tax law does not provide for a deferral of taxes on foreign income. Special rules for taxing undistributed income of foreign subsidiaries are applicable only to foreign investment funds.
Please note that a CFC rule entered into force for financial years beginning after 31 December 2018. For further details, see Controlled foreign companies (CFCs) in the Group taxation section.