What are the key features of that Austrian holding regime ?
Domestic holding:
Intercompany dividends paid between two Austrian companies are tax exempt in the hands of the receiving Austrian company. Capital gains arising from the sale of shares in an Austrian corporation held by another Austrian corporation are taxable and are due to the standard flat corporate tax of 25 %. Financing costs effectively connected with the acquisition of the shares held are fully tax deductible.
Foreign holdings:
Provided that the Austrian company holds at least 10 % of the shares of a foreign corporate entity, comparable to an Austrian GmbH, for at least one year, any dividends received by the Austrian company and any capital gains resulting from the sale of the shares of the foreign corporation are tax exempt in Austria.
Regardless whether Austria has a treaty with that foreign country or not.
This tax exemption is also valid if the foreign subsidiary of the Austrian company is located in a non-tax treaty country or in an off-shore jurisdiction.
No debt-equity ratios or thin cap rules.
Austria does not apply thin capitalization rules or debt-equity-ratios which would limit the deductibility of interest payments. So Austrian corporations can leverage the acquisition of foreign shareholdings or any other investments. Interest is fully tax deductible and can compensate any other income which is achieved by the Austrian corporation.
There is no withholding tax on interest paid to foreign lenders, regardless where they are located. So even interest payments to off-shore companies are not exposed to any withholding tax at source in Austria.
The Austrian heck-the-box system.
An Austrian corporation can make capital gains taxable if it wishes to do so. The Austrian company just has to heck-the-box in its tax return and can select for which participation any capital gains resulting from a sale should be taxable. Nevertheless dividends received stay tax-exempt.
The foreign subsidiary.
NO CFC legislation
Austrian law does not know CFC-legislation or similar regulations. Nevertheless it is important to know how income achieved by a foreign subsidiary has impact on the tax situation of the Austrian parent company.
Provided that the Austrian corporation holds shares in a foreign entity which achieves passive income the sale of such a participation and the dividends when, paid to the Austrian company, will be taxable. The mere holding of such corporations does not trigger any taxes.
What is seen as passive income ?
The Austrian tax authorities categorize income as passive if the following income is achieved by the foreign subsidiary and, at the same time, the overall tax burden of this subsidiary is not more than 15 %.
- Interest income
- Royalty income
- Capital gains achieved by selling
shareholdings of less than 10 % in other corporations
Dividends are tax exempt if resulting from rental income (considered to be active income)
Dividends are tax exempt even if the foreign subsidiary is not subject to taxes
It is important to know, that if the foreign subsidiary achieves profits from buying and selling securities, treasury bonds or stocks this is considered to be active income and therefore any dividends paid to the Austrian company and any capital gains achieved by the Austrian company are tax exempt.
Example:
Dividends and capital gains are $$$$
The foreign subsidiary is making losses.
Due to the new group taxation system, losses, suffered by foreign subsidiaries, can be set off from the domestic tax base of the Austrian company holding shares in such a subsidiary, provided that the Austrian company holds more than 50 % of the shares of the foreign subsidiary. These foreign losses have to be exposed to taxes in the hands of the Austrian corporation when the foreign entity is using these losses as a loss carry forward to compensate its own tax burden.
Although losses from the foreign subsidiary can be set off from the tax base of the Austrian parent dividends paid by such a foreign entity are tax exempt.
Such dividends from foreign entities are tax exempt even if the foreign entity is not due to taxes.
Indirect holdings.
According to Austrian law also indirect participations via partnerships lead to tax exempt income for the Austrian holding company as the following graphic shows:
Tax treaty network.
Taking into consideration that Austria has a far reaching treaty network (currently 90 treaties) including countries like Barbados, Belize, Estonia, Hong Kong, Liechtenstein, Luxembourg, Malta, San Marino, Switzerland, Singapore, UAE and Cyprus just to name a few of those, which also have very interesting tax regimes, it is of course a fact, that these very interesting tax treaties open a bundle of tax planning opportunities.
Dual resident companies.
Any corporate entity, regardless where domiciled, has access to the Austrian holding system, provided that the management of the foreign parent company is located in Austria. This would be the case when a BVI company is holding shares in a Russian or Ukrainian company but the managing director of the BVI company is resident in Austria.
Obtaining royalty income via Austrian companies.
Austrian companies are quite often used to obtain royalty income from foreign sources.
Austria has a large number of tax treaties (more than 89) with other countries and a large number of these treaties provide for a zero withholding tax rate levied upon royalty payments to or from Austrian companies.
These are the treaties with:
Belgium, Belize, Bulgaria, Canada,Croatia, Cyprus, Czech Republic, Denmark, Egypt, Faroer Islands, France, Georgia, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Russia, San Marino, Slovak Republic, Slovenia, South Africa, Sweden, Switzerland, Tadjikistan, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States.
In case of other treaty countries the withholding tax rate is significantly reduced ranging between 3 % and 10 %, only in some cases 15 %.
Using regulations laid down in Austrian tax law such royalty income routed via an Austrian company can lead to a profit exposed to a tax bracket of only
4 % to 8 %.
Austrian Trading Company.
An Austrian Company can serve perfectly as an agent for an off-shore principal and profits resulting from the trade of goods are then exposed to an effective tax bracket of only 2 % to 5 %.
Summary.
The large treaty network in combination with a perfect holding regime together with the possibility to obtain binding rulings from the Austrian tax administration make Austria a perfect place for holding companies and further tax planning activities.
