Austria
Paul Doralt
Dorda Brugger Jordis
Austria
Paul Doralt of Dorda Brugger Jordis explains that the government included changes to group taxation and participation exemption rules in new legislation during 2009
In the first half of 2009 the new Austrian government (a coalition between the Conservative and the Social Democrat parties) introduced a Tax Reform Act. Most of the changes included in this Act were of a technical rather than fundamental nature and aimed to provide a stimulus for the slowing economy (such as the reduction of individual income tax rates).
There were important changes for international tax planning.
Austrian group taxation regime
The new Tax Reform Act modified slightly the rules of the Austrian group taxation regime, which is widely used by medium sized and large groups with operations in Austria.
Under the new rules all members of the tax group (group parent and group members) must have the same financial year end. The new rule is valid for new groups with immediate effect. Existing tax groups have been given until 2011 to align the financial years of all their group members.
The Austrian group taxation regime allows the cross-border use of losses; that is, losses of non-Austrian subsidiaries may be used for offsetting taxable profits of the Austrian group parent. Since the introduction of the cross-border loss consolidation regime in 2004 such loss offset had to be reversed at the level of the Austrian group parent as soon as the non-Austrian group member had the opportunity to make use of these losses previously used in Austria in its own jurisdiction, for example, by way of offsetting profits against loss carry forwards. The same reverse of previous tax loss credits at the level of the Austrian group parent occurred once the foreign group member left the tax group, for example, due to a disposal of its shares by the group parent.
Under the new modification introduced by the Tax Reform Act a foreign member of a group is deemed to have left the tax group (and thus the group parent has to reverse previously used loss credits) once the activities of the foreign members of the group cease to be comparable to target the activities that were generating the previously used losses. This new rule is against strategies which tried to avoid the reversal of loss credits by keeping a previously loss making company alive as a dormant shell company.
Modification of international participation exemption
Under the rules of the Austrian international participation exemption, dividends received from a foreign subsidiary are exempt from Austrian corporate income tax if the parent company holds at least 10% in the foreign subsidiary for a holding period of at least one year. As a consequence of this rule, dividend income received from portfolio dividends, which apparently do not meet this requirement, was fully taxable in Austria.
Under the new rule the exemption now also applies to portfolio dividends regardless of participation, interest stake or holding period. The only requirement is that the company distributing the portfolio dividend is resident in i) an EU member state; or ii) in a member state of the EEA, where an agreement on full information and enforcement of tax matters is in force with Austria (this only applies to Norway at the moment).
Other than the full participation exemption which, not only provides an exemption for dividends received but also for capital gains upon disposal of the participation, the exemption for portfolio dividends does not provide any exemption for capital gains.
A further difference from the full participation exemption is that the exemption for portfolio dividends only applies if the distributing subsidiary is subject to a minimum tax rate of 15%. If the tax rate is below this threshold the new law provides for a switchover from the exemption to a credit method. In the case of the full participation exemption, a tax rate below 15% in the subsidiary only leads to a switchover to the credit method if the subsidiary also has primarily passive income.
Paul Doralt (paul.doralt@dbj.at), head of tax desk at Dorda Brugger Jordis