Issue 61

Austrian Annual Tax Act 2018 ('Jahressteuergesetz 2018')

The new Austrian government has announced that it will only enact one annual amendment to tax law per year. The draft of the Annual Tax Act 2018 (‘Jahressteuergesetz 2018’) was published on April 9, 2018. The bill will include the implementation of large parts of the EU Anti Tax Avoidance Directive (ATAD), as well as other changes to Austrian business taxation.

Please note that the bill is currently only a draft, which is subject to review and is currently being discussed in the Austrian Parliament. The final version of the Act is set to enter into force in the second half of 2018.

Adaptations in accordance with the ATAD
1) Draft on first CFC-rule in Austria and adaptations to switch over (‘Low-taxed passive income’)

For the first time in Austrian tax law history, a CFC rule will be implemented. Austria opted to implement option A of Article 7(2) EU ATAD (‘category-based approach’). Passive income is defined exhaustively under this provision, which covers in particular interest, royalties, dividends, and income from financial leasing, but also income from the disposal of shares and from insurance, banking and other financial activities. The foreign company will be considered to be low-taxed if the effective tax rate of the entity is 12.5% or below – meaning that companies situated in Ireland or Cyprus will potentially be covered. The implementation of a CFC rule will also lead to adjustments to the current switch-over regime for dividend distributions from low-taxed and passive subsidiaries. Both rules are combined into a new version of Section 10a Austrian Corporate Income Tax Act (‘low-taxed passive income’).

A foreign company (also including permanent establishments) is considered to be controlled (‘CFC company’) if the Austrian entity directly or indirectly, independently or together with other related entities:

  • holds more than 50 % of the voting rights, or
  • owns more than 50 % of capital, or
  • is entitled to receive more than 50 % of the profits.

The CFC rule will lead to the inclusion of the passive income of a foreign company to an Austrian corporation if it directly or indirectly controls this foreign company, which generates passive income and is subject to low taxation (CFC income). The CFC income is added to the Austrian income and will be calculated in accordance with Austrian tax law.

The main exemptions from the CFC rule that could apply:

  • The CFC rule will not apply, if – on an ongoing basis – not more than one third of the income of the CFC company classifies as passive income (de-minimis exemption).
  • The CFC rule will not apply if the CFC company carries on significant business activity (supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances).

  • In addition, a specific exemption for undertakings in the finance industry (Art 7(3) ATAD) will be implemented.

Further details – such as the determination of the amount and the quota of the CFC income, as well as crediting of a pre-tax burden or details of the switch-over regulation – will be laid down in a separate regulation. The draft of the regulation is not yet available.

The new switch-over rule for dividend distributions (switch from exemption to credit method) will apply for investments of 5 % or more in a foreign low-taxed, passive company. Dividend income will be fully disregarded in the classification of a company as passive (i.e. mainly engaged in the realisation of passive income). The switch-over rule is not intended to apply to CFC income already allocated to the Austrian corporation.

According to the draft bill, the new CFC and switch-over rules will be applied for financial years beginning after 30th September 2018.

2) General anti-avoidance rule

The new definition of abuse will include elements of the settled case law of the Austrian administrative high court as well as of the ATAD. From today’s perspective, however, it is not clear whether the interpretation of the Austrian anti-abuse regulation will be changed. It is possible that a more stringent interpretation will be applied.

No specific date is envisaged for the legal amendments to enter into force. Thus they will enter into force the day after the Annual Tax Act 2018 is published.

3) Exit Taxation

In the case of an exit tax in relation to EU or EEA states, business taxpayers have so far been able to distribute the tax amount across 7 annual instalments for fixed assets and 2 annual instalments for current assets upon application. With the Annual Tax Act 2018, the period for fixed assets will be reduced to 5 annual instalments in accordance with the ATAD.

In addition, the circumstances under which the remaining instalments will be due prematurely will be expanded to reflect Art 5(4) ATAD.

The changes will come into force on 1.1.2019.

4) Interest limitation / hybrid mismatches

The draft bill does not include the implementation of an interest limitation rule or the implementation of new regulations regarding hybrid mismatches, which also need to be implemented in accordance with the ATAD in subsequent years.

Implementation of horizontal monitoring

The Austrian Ministry of Finance ran a pilot project for horizontal monitoring from 2011 onwards. The project was concluded positively and will now be implemented generally. The horizontal monitoring will be designed as a continual ongoing tax audit instead of non-cyclical audits for several tax years. Horizontal monitoring will be based on the principle that the ongoing monitoring of the tax compliance of the taxpayer is in principle ensured by its internal tax control system. There should be no general overall in-depth audit but certain relevant and important issues could be audited selectively in more detail. During horizontal monitoring, the taxpayers will be subject to an enhanced obligation to disclose information.

Horizontal monitoring will be an optional system. In order to participate, the taxpayers will need to fulfil certain formal requirements (such as a turnover exceeding EUR 40m or integrity in accordance with financial criminal law in the last 5 years prior to the application) and will need to provide an audit certificate that a functional internal tax control system has been implemented. Fulfilment of the requirements will be checked by an external inspection. Each taxpayer (corporation) will be able to decide individually whether it applies for horizontal monitoring, except for corporate tax groups, which will have to include all Austrian members.

Horizontal monitoring will be implemented as of 1.1.2019, with a seamless transition for companies participating in the pilot project.

Overview of other main amendments:
  • New withholding tax for specific infrastructure projects:
    In general, payments made from specific infrastructure providers to other individuals or companies for granting the right to use their land include several components that are taxed differently, such as fees for the use of land, compensation for reductions of assets, or compensation for loss of earnings in the area of agriculture. In order to simplify the taxation of these payments, certain infrastructure providers (specific companies supplying electricity, gas, oil and district heating) will be obliged to withhold 10 % for individual persons and 8.25 % for corporations from each payment (excluding VAT). The infrastructure provider will be obliged to pay the withheld tax to the tax authorities annually on 15 February of the following year. The withholding tax will be final for the recipient individuals and corporate taxpayers, but they will be able to opt for standard taxation.
  • Extension of advance rulings: From January 1, 2019 advance rulings will also be available for questions regarding international tax law (include transfer pricing issues) as well as anti-abuse in accordance with Section 22 Austrian Federal Fiscal Code, and from January 1, 2020 for questions regarding VAT.
  • Real Estate Transfer Tax: A clarification will be added to the rules on the unification of shares (Sections 1 (2a) and (3) Austrian Real Estate Transfer Tax Act) that real estate will only be attributed to a partnership or company if it was acquired through an act in accordance with Sections 1(1) or (2) RETTA. This means that an indirect unification of shares could not trigger RETT.
  • The applicability of the tax demerger regime (e.g. for cooperatives or insurance associations) will be extended until 1 January 2023.

  • Disallowance for interest and royalties: The observation period in the case of tax refunds (Section 12 para 1 subpara 10 line 4 Corporate Income Tax Act) will be increased to 9 years (from 5 years).

  • Adaptation of the withholding tax refund procedure: Previously, applications for the refund of capital gains tax had to be sent in hard copy to the competent tax office. As of 1 January 2019, an advance declaration will have to be filed electronically in addition to the filing of the paper application.

Martina Gruber

Michael Wenzl

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When does a home office constitute a permanent establishment?

The Federal Ministry of Finance published a letter ruling regarding the question of whether a home office can constitute a permanent establishment (EAS 3392 of 6 November 2017).

In the case at hand, an employee of a German company living in Austria was given the option to complete some of his work at home. The question arose as to whether this home office represents a domestic permanent establishment of a foreign entity, thus triggering domestic tax liability. It is important to note that the German employer had no connection to Austria, other than through this one employee, and that the employee lacked the authority to conclude contracts on the company’s behalf. The employee’s tasks that could be carried out at home were limited to preparatory work, and furthermore, the employee could decide whether he wanted to carry out such work from home.

In the letter ruling, the Ministry argues against a possible tax liability by referring to a recent draft commentary on Art 5 of the OECD Model Tax Convention. According to this draft, an individual’s home office does not automatically constitute a location at the disposal of the enterprise, unless the employee is clearly required to carry on business activities at home and does so continuously. Applied to this case, the employee’s home office will most likely not constitute a permanent establishment seeing that “the carrying on of business activities (…) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise”.

Christof Wörndl

Dorothea Reining

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Austrian Supreme Administrative Court (VwGH) on losses from the conversion of foreign currency loans

In its ruling of 18 December 2017 (Ro 2016/15/0026), the Austrian Supreme Administrative Court (VwGH) has held that at the borrower’s side loss restrictions from the conversion of loans from a foreign currency into Euros do not apply.

Background

In general, an individual’s business income is subject to a progressive income tax rate up to 55%. However, income from capital assets (Section 27 EStG) held in the business sphere is subject to a special tax rate of 27.5%.

As income from capital assets is subject to the special tax rate, only 55% of capital losses derived from the sale of capital assets or of any depreciation of capital assets in business sphere, as defined by Section 27 para 3 EStG, may in turn be offset against business revenue according to Section 6 no 1 lit c EStG.

In its ruling, the VwGH addressed the question as to whether losses from the conversion of an foreign currency loan into Euro are governed by Section 27 para 3 EStG and would thus be affected by the loss utilization restriction at 55% .

Ruling of the VwGH

The Austrian Tax Office and the Austrian Federal Financial Court (BFG) have previously assumed that losses from the conversion of foreign currency loans are governed by Section 27 para 3 EStG, and may thus only be offset at 55%. However, the VwGH has not shared this opinion.

According to the VwGH the criteria of a restriction of loss utilization only apply to assets (Section 27 para 3 EStG) of which the revenue is classified as income from capital assets and thus subject to 27.5% tax rate. In the view of the VwGH, a foreign currency loan does not represent a capital asset according to Section 27 para 3 EStG on the borrower’s side. Unless there is a capital asset, expenses should be fully tax deductible. The lender, on the other hand, accrues revenue from the corresponding foreign currency loan as defined by Section 27 para 2 EStG, for which reason foreign currency profits/losses must also be qualified as revenue from capital assets.

Conclusion

On the borrower's side, the following applies for the conversion of foreign currency loans into Euro:

  • Within business sphere, losses are fully deductible; profits are fully subject to the progressive tax rate up to 55%
  • Within the private sphere, profits and losses from the conversion into Euro are only taxable, if the conversion is made within one year (speculative transaction).

On the lender's side, all profits and losses in connection with foreign currency loans are to be classified as income from capital assets.

It is expected that also the tax administration will follow the VwGH’s case law and amend the tax guidelines in this respect.

Benjamin Fassl

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Input VAT deduction – Tighter controls by the Austrian tax authorities

Background

The Austrian tax authorities are currently implementing tighter controls on input VAT deduction. Recently, the tax offices have focused on whether input VAT deductions are carried out in the correct period. In this context, the tax authorities have issued requests for information on invoice dates in some cases, in order to review the year-end cut-off, e.g. for invoices issued at the end of December and posted in January of the following year. If the input VAT for the invoices was claimed in the VAT return for January of the following year, the Austrian tax authorities denied the deduction of input VAT for these invoices.

This is based on (older) Austrian case law and the Austrian VAT guidelines, which stipulate that input VAT may be deducted solely in the period of the invoice date. The date of receipt of the invoice is irrelevant for the deduction of input VAT. The VAT guidelines provide for an exception if the invoice reaches the recipient after the filing due date of the VAT return.

Example

For an invoice dated 28 December 2017, the input VAT may only be deducted in the monthly VAT return for December 2017 or the annual VAT return for the year 2017, regardless of the date when the invoice is actually received by the taxpayer.

The Austrian tax authorities denied input VAT in some recent cases on the basis of current Austrian case law and VAT guidelines. From our point of view, it may be doubtful whether this practice is in line with European VAT law.

Recommendation

Based on the above, to avoid the denial of input VAT deduction, it is important that the input VAT is deducted in the correct period/VAT return.

Rupert Wiesinger

Melanie Kaltner

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ECJ on the application of the triangulation simplification

In the case of ‘Hans Bühler KG’ (C-580/16, dated 19 April 2018), the ECJ ruled on the questions as to whether the application of the triangulation simplification is restricted if the formal requirement of filing a proper EU Sales Listing is not met, and as to whether the triangulation simplification can still be applied if the middleman in a triangulation supply is established or VAT registered in the Member State of dispatch.

Decision by the ECJ

One of the formal requirements for the application of the triangulation simplification is for the middleman in a triangulation supply to properly file EU Sales Listings by the end of the month following the triangulation supply. The ECJ concluded that the triangulation simplification can still be applied, even if this formal requirement has not been met (in the case in question, the EU Sales Listings were later amended), provided that the middleman has not committed VAT evasion intentionally and that non-compliance with formal requirements did not prevent the tax authorities from verifying that the material requirements had been met.

Based on the Austrian VAT Guidelines, the triangulation simplification cannot be applied if the middleman is established in the country of dispatch. However, as of 2015, the registration of the middleman for VAT purposes in the Member State of dispatch is not deemed to be prejudicial to the application of the simplification rule under the Austrian VAT Guidelines. According to the ECJ, the EU VAT Directive must be interpreted as if neither a mere VAT registration, nor the establishment of the middleman in the Member State of dispatch is prejudicial to the application of the triangulation simplification.

Implications

In this ruling, the ECJ stated that the timely and proper filing of EU Sales Listings as a formal requirement for the application of the triangulation simplification is less decisive than the Austrian tax authorities had considered it to be in applying the triangulation simplification. This decision contradicts the view of the Austrian tax authorities (e.g. Salzburger Steuerdialog 2015) as well as that of the Austrian Administrative Court (BFG – 5.1.2015, RV/2100519/2013).

With regard to the question as to whether an establishment of the middleman in the Member State of dispatch is prejudicial to the application of the triangulation simplification, the ECJ interpreted the EU VAT Directive in line with past decisions, i.e. in terms of the objectives of the EU VAT Directive and not merely its wording. This interpretation is also in line with the prevailing opinion in Austrian VAT literature.

Whether the arguments discussed by the ECJ with regard to the formal criteria of filing proper and timely EU Sales Listings could also apply if taxable persons failed to meet formal invoice criteria in connection with triangulation simplifications remains uncertain. One difference between the formal requirements of filing EU Sales Listings and meeting invoice criteria might be that the third party in a triangulation supply would be unaware of whether the middleman was applying the simplification rule, thus shifting the VAT liability from the middleman to the third party, while the EU Sales Listings merely serve reporting purposes.

Rupert Wiesinger

René Adam

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Austrian Tax Facts and Figures

Tax Facts and Figures
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Editor: Christof Wörndl, christof.woerndl@at.pwc.com

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