Issue 62

In this issue

Update: Austrian Annual Tax Act 2018 ('Jahressteuergesetz 2018')
by Martina Gruber und Michael Wenzl

Recent letter rulings on Permanent Establishments
by Marlies Ursprung-Steindl and Nikola Breinhölder

Austrian Federal Fiscal Court detects abuses in the application of the Parent-Subsidiary Directive
by Franz Rittsteuer

Indirect Taxes

German Finance Ministry abolishes simplification rule for intra-Community transfers in border areas
by Helene Breit

Austrian Supreme Administrative Court confirms recent CJEU rulings on relevance of formal requirements
by Anna Schefzig and René Adam

Amendment of the Austrian Chamber of Commerce Act
by Rupert Wiesinger and Helene Breit

Tax Facts and Figures

Update: Austrian Annual Tax Act 2018 ('Jahressteuergesetz 2018')

The Austrian Annual Tax Act 2018 has completed the legislative process and was published in the official gazette on 14.8.2018. The main content of the draft act was addressed in detail in Austrian Tax News Issue 61. Some significant changes were made to the draft. Here we report only on significant differences between the draft and the law as finally enacted.

CFC rule and amendments to the switch-over regime

Tax-exempt dividends and capital gains

Amendments and details were provided regarding CFC rules and the new switch-over rules, and the entry into force of both rules was postponed to the financial years beginning after December 31, 2018.

No changes were made to the exhaustive catalogue of passive income. Only the definition of dividends and income from the alienation of shares was restricted.

Dividends and income from the alienation of shares are treated as passive income if the dividend or capital gain would have been taxed under Austrian tax law (as if the Austrian entity had received the dividend/capital gain directly). As a result, dividends and capital gains from international participations are not classified as harmful passive income if these are received from actively operating subsidiaries.

For the calculation of the de-minimis exemption, it has been clarified that tax-exempt dividends and income from the alienation of shares from non-harmful, actively operating subsidiaries (as stated above) may be included in the total income under Austrian law. This amendment relaxes the calculation for mere holding structures if passive income (e.g. minor interest income) exceeds one third of the total income (including tax-exempt dividends and tax-exempt capital gains).

Calculation of allocation amount/quota and crediting for the CFC regime

A foreign company (also including permanent establishments) is considered controlled (a ‘CFC company’) if the Austrian entity holds directly or indirectly, independently or together with other related entities, more than 50 % in voting rights or stock, or has the right to receive more than 50 % of the profit. The voting rights, stock and profit rights are decisive for the controlling ratio. For the allocation ratio, it is primarily the direct and indirect shares that are assessed by multiplication.

As a result, the allocation of passive income may apply simultaneously on various levels in the group by applying different allocation ratios, especially in the case of indirectly held foreign subsidiaries (‘multiple allocations’). The following measures are intended to prevent double taxation through various allocations of passive income:

In the event of multiple allocations of passive income to several Austrian entities (national multiple allocation), the income will only be added to the directly participating Austrian companies.
In the event of cross-country multiple allocations, the allocation amount will be reduced (or avoided) by crediting the foreign allocation amount (comparable to Austrian tax law).

Other significant changes

Advance rulings: According to the explanatory note , the scope of advance rulings for ‘international taxation’ should only cover questions regarding intergovernmental law (such as double tax treaties) but not questions concerning Austrian foreign tax law (such as CFC or exemptions from withholding taxes).

Ultimate Beneficial Owner Register: Excerpts from the ultimate beneficial owner register will be exempt from stamp duty. However, a separate user fee provision exists which stipulates the fees for excerpts. Additionally, protection against queries (upon application) for the ultimate beneficial owner was implemented in the Ultimate Beneficial Owner Register Act.

Martina Gruber

Michael Wenzl

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Recent letter rulings on Permanent Establishments

Austrian Ministry of Finance inclined to agree with the interpretation of the painter example

In the ‘painter example’, the OECD takes the view that the mere presence of the painter in an office building without having the facilities where he is performing his activities (painting) at his disposal constitutes a permanent establishment (‘PE’) of the painter. The Austrian Ministry of Finance (BMF) has previously rejected this interpretation. In letter ruling no. 3391, the BMF now seems inclined to agree with this interpretation of the painter example. However, in line with the Commentary on the OECD Model Tax Convention 2017, the BMF does not deem a foreign company to have an Austrian PE if the company’s presence at a given location is intermittent or incidental. Despite the approach taken by the BMF in the painter example, the extent to which the facilities have to be used in order to establish a PE is not yet clear.

Independent projects of affiliated companies in Austria have to be assessed separately

In letter ruling no. 3404, the BMF considered whether an existing PE of a foreign company in Austria might also establish a PE for a subsidiary operating in Austria. The subsidiary carried out a separate independent project in Austria in which the parent company with a PE in Austria was not involved.

The BMF did not follow the principle of general ‘force of attraction’ but separately examined whether each company had established a PE in Austria with its activities. The BMF concluded that an Austrian PE of the parent company cannot automatically establish a PE for a subsidiary operating in Austria, if the activities carried out by the subsidiary are not considered activities of the parent company.

A subcontractor may establish a PE for the general contractor

The approach taken by the BMF in letter ruling no. 3405 conforms with the Commentary on the OECD Model Tax Convention 2017, according to which a subcontractor may establish a PE for the general contractor. The period spent by a subcontractor working on a building site must be considered as time spent by the general contractor on the building project under the following circumstances:

The general contractor legally owns the construction site
The general contractor is the only contracting party and bears overall responsibility for the overall performance
The general contractor controls the access and use of the site or assembly facility.

Criteria for PE exemption

According to letter ruling no. 3399, the BMF considers the mere collection of information about market conditions to be a preparatory or auxiliary activity. However, the evaluation of customer information (such as credit screening of potential future customers) in order to provide the head office with a basis for deciding whether the insurance application should be approved or rejected goes beyond the preparatory or auxiliary threshold. The management and coordination of an independent distribution network also go beyond the preparatory or auxiliary threshold, as they are deemed to play an active role in increasing revenues.

Marlies Ursprung-Steindl

Nikola Breinhölder

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Austrian Federal Fiscal Court detects abuses in the application of the Parent-Subsidiary Directive

In an order dated 4 December 2017 (RV/7106377/2016), the Austrian Federal Fiscal Court (BFG) ruled that in a given case the use of a holding structure in Luxembourg with both substance and function represented an abuse of the Parent-Subsidiary Directive.

Circumstances

A Luxembourg company (LuxCo1) holds 39.73% of the shares in an Austrian joint-stock company (L-AG). Another Luxembourg company (LuxCo2) holds 100% of the shares in LuxCo1. An Australian fund participates in LuxCo2 at 100% via a trust company (T-Ltd, domiciled in the Cayman Islands). The Australian company B Pty Limited has an advisory contract with the fund.

LuxCo1 does not have its own employees or offices and holds no other participations. The management of LuxCo1 is conducted by LuxCo2.

Since April 2015, LuxCo2 has 3 employees (managing director and accountant, full-time; office manager 32hrs/wk) and offices in Luxembourg. Furthermore, LuxCo2 has four (indirect) participations in companies in the field of infrastructure.

In May 2015, the Austrian company L-AG distributed around EUR 10m in profits. As the minimum retention period of one year for withholding tax exemption at source was not met at this point, around EUR 2.5m in withholding tax was withheld by L-AG and paid to the Austrian Tax Office. After the minimum retention period was observed in full, LuxCo1 submitted an application for refund. This application was rejected by the Austrian Tax Office with the justification that the facts of the case offered no indications that the intermediary role of the Luxembourg companies served any commercial purpose or fulfilled meaningful functions. The only discernible purpose of these Luxembourg companies was deemed to be ‘directive shopping’. The use of the companies was therefore deemed to be improper.

LuxCo1 appealed against the rejection of its application by the Austrian Tax Office. The central arguments made by LuxCo1 were that LuxCo2 is functionally operative and serves furthermore as a platform for investments in infrastructure companies. No abuse is therefore present because the Luxembourg companies do not lack functions and do not constitute artificial structures.

Justification of the Austrian Federal Fiscal Court

The BFG rejected the appeal by LuxCo1 using the following arguments:

The explanation that LuxCo2 serves as a platform for various investments in infrastructure companies does not fulfil the requirement of an intermediary role for an EU company.
Distributions of profits to holding companies with operational companies behind them that are domiciled in the EU are not improper. However, LuxCo2 is not an operational company. The BFG argued that this company had only 3 employees from March 2015 and from September 2014 to March 2015 had only one employee (who worked 2 to 3 days in the Luxembourg office).
The Australian fund is not an EU company to which the Parent-Subsidiary Directive applies. LuxCo2 has been used as an investment platform since it was founded in 2010. However, on the basis of the overall picture of the various structures, it may be assumed that LuxCo2 does not conduct management activities itself. These are instead carried out by the fund, which has the financial means and the expertise (via B Pty Ltd) in order to do so.

The present structure may therefore be deemed to be improper under Section 22 Austrian Federal Tax Code (BAO).

The case is pending before the Austrian Supreme Administrative Court (VwGH) as item Ro 2018/13/0004.

Outlook

It is surprising that the structure has been qualified as improper, even though the company has both substance (its own office; 3 qualified employees who provide management services) and a function (pooling of investments) on the level of LuxCo2.

In our opinion, the justification provided by the BFG is not convincing and it is questionable whether it can be reconciled with the case law of the VwGH.

It should also be noted that the BFG order was issued on 4 December 2017, while the CJEU rulings on Deister Holding (C-504/16) and Juhler Holding (C-613/16) were only issued on 20 December 2017. Both these CJEU rulings concerned abuses in connection with the Parent-Subsidiary Directive under similar circumstances. In our view, the CJEU took a more narrow view of what constitutes an improper structure.

As stated above, the case is pending before the VwGH. In our view, there is a good chance that the VwGH will overrule the BFG.

At present, it may be assumed that refund applications for withholding tax on distributions of profit on the basis of the Parent-Subsidiary Directive or Double Taxation Agreements will in future be examined more critically by the competent tax offices. For this reason, it is worth exercising greater caution with refund applications.

Franz Rittsteuer

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German Finance Ministry abolishes simplification rule for intra-Community transfers in border areas

In a letter dated 23 April 2018, the German Federal Ministry of Finance announced the abolition of the simplification rule for intra-Community transfers in border areas. This action can impact Austrian businesses.

Previous situation

If a business domiciled within the European Union supplies a business in another Member State, and if it is known at the time of supply to whom the supply of goods will ultimately be made, then in general an intra-Community supply of goods is carried out. The recipient of the supply has to declare an intra-Community acquisition.

The German VAT Application Decree previously included a simplification rule for such situation, the so-called ‘Pommes-Erlass’. According to this rule, regular supplies of goods to a large number of smaller customers in border areas, within the context of which a business supplies goods directly to a customer in the destination state, may under certain circumstances be qualified as a deemed intra-Community supply of goods with subsequent domestic supply to the customer.

A corresponding rule is included in the Austrian VAT Guidelines under Item 3604.

New legal situation

In a letter dated 23 April 2018, the German Federal Finance Ministry announced the abolition of this simplification rule. The change will affect all ongoing cases, although there will be a transition period lasting until 31 December 2018.

If the ultimate recipient of the goods is already known at the time of supply, and if the other preconditions for an intra-Community supply of goods are met, then in future the supply should be treated as an intra-Community supply of goods in all cases. The customer is obliged to declare an intra-Community acquisition (with the exception of, for example, those businesses and organisations exempt from VAT whose income from intra-Community acquisitions does not exceed a particular limit [‘Schwellenerwerber’]).

Consequences

Both the Member States concerned must permit the application of the simplification rule for intra-Community transfers in border areas before such an application is possible. The abolition of this simplification rule in Germany means that Austrian suppliers and customers, who have previously used the simplification for intra-Community transfers with large numbers of recipients in border areas with regard to Germany, will in future no longer be able to apply the simplification rule (beginning 1 January 2019 at the latest).

The abolition of the simplification rule will lead in particular to changes in billing practices and an increased administrative burden. In future, suppliers will have to verify whether the prerequisites exist for tax exemption of intra-Community supplies of goods and keep corresponding records. The customer, frequently a small customer, will be required to have a VAT identification number.

Businesses affected by the change should contact their business partners to discuss future billing practices.

Whether Austria will also abolish the simplification rule contained in the VAT guidelines for inter-Community transfers with a large number of customers remains to be seen.

Helene Breit

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Austrian Supreme Administrative Court confirms recent CJEU rulings on relevance of formal requirements

The Austrian Supreme Administrative Court (VwGH) recently ruled on two cases in which the Austrian tax authorities denied input VAT deduction based on the argument that the invoicing requirements were not fulfilled. In both judgments, the VwGH referred to various rulings of the European Court of Justice (‘CJEU’) on the relevance of material requirements and formal requirements in connection with input VAT deduction.

1. Ruling dated 25 April 2018: ‘2018/13/0001’

a. Background

A taxable person hired various construction companies for refurbishment work on an existing building. In the course of a tax audit, the auditor deemed some of the contracted construction companies to be shelf companies, with one argument being that the taxable person settled all incoming invoices from the hired companies, totalling more than EUR 800,000, by cash payment directly on the construction site. In addition, no business activities were carried out by the construction companies at the addresses stated in the Austrian Commercial Register.

Input VAT deduction for invoices issued by the contracted companies was denied based on the argument that the (alleged) shelf companies did not carry out any business activities at the addresses stated on the invoices and, therefore, some formal requirements for input VAT deduction were not met.

b. Legal assessment of the Austrian Supreme Administrative Court

The VwGH referred to the CJEU rulings ‘Geissel’ (C-374/16) and ‘Butin’ (C-375/16), in which the CJEU ruled that input VAT deduction has to be granted if the material requirements are met.

Material requirements are fulfilled if goods/services are supplied/rendered by taxable persons to another taxable person (i.e. one that claims input VAT deduction) and used for subsequent taxable supplies. A complete invoice according to Section 11 of the Austrian VAT Act, however, is only a formal requirement. Input VAT deduction cannot therefore be denied based on the argument that the supplier appears not to have a business address at the place stated on the invoice, or does not carry out any business activities at the stated address, as long as the material requirements are met.

As the Austrian tax authorities did not base their arguments for denying input VAT deduction on the (allegedly) fraudulent circumstances but merely on non-compliance with formal requirements (i.e. the address), the VwGH cancelled the VAT assessment for the respective periods due to the unlawfulness of its content.

Consequently, the court of appeal (Austrian Federal Fiscal Court [BFG]) will have to rule again on the case.

2. Decision dated 29 May 2018: ‘Ra 2016/15/0068’

a. Background

In this case, a taxable person received invoices including a general and inaccurate description of the supplied goods and services, such as ‘temporary transfer of personnel’, ‘material usage’ and ‘phone usage’. In addition, the invoice did not show an (entirely) correct address (i.e. number ‘76’ instead of ‘76a’).

In the course of a tax audit, the auditor denied the deduction of VAT resulting from these invoices based on the arguments that the service description was insufficient and the address incorrect. After filing an appeal, the taxable person was able to specify the received goods and services by providing further information in the course of an oral negotiation before the court of appeal (Austrian Federal Fiscal Court [BFG]). While ruling that the minor error in the taxable person’s address is not decisive, the BFG did not accept the supplementary information/documentation, as no references were included on the initial invoices.

b. Legal assessment by the Austrian Supreme Administrative Court

The Austrian Administrative High Court referred to the CJEU rulings ‘Barlis 06’ (C-516/14) and ‘Senatex’ (C-518/14), in accordance with which input VAT deduction must not be denied if a given invoice does not meet all formal requirements, provided that the material requirements are met. If the tax authorities are able to assess whether the material requirements are met based on the information the tax authorities already have, or based on additional documents provided by the taxable person, input VAT deduction must be granted even if not all formal requirements are fulfilled.

Consequently, the VwGH cancelled the VAT assessment for the period concerned, which denied input VAT deduction based on missing formal requirements, and stated that it would have been possible to investigate whether the material requirements for input VAT deduction were met.

Consequently, the court of appeal (BFG) will have to rule again on the case.

3. Conclusion

The above-mentioned decisions by the VwGH are the first Austrian tax cases confirming the recent CJEU rulings on the relevance of formal requirements. The VwGH followed the CJEU and ruled that input VAT deduction has to be granted if the material requirements are fulfilled. This applies even if formal invoice requirements are missing. The Austrian tax authorities will thus need to adapt their practices to the new case law and focus on the fulfilment of material requirements, while input VAT deduction must not be denied if only formal invoicing requirements are not met.

Anna Schefzig

Rene Adam

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Amendment of the Austrian Chamber of Commerce Act

The amendment of the Austrian Chamber of Commerce Act mainly brings changes to the way the contribution to the Austrian Chamber of Commerce is calculated, as well as the applicable percentage rate. The amendment will come into effect as of January 1, 2019.

Here is an overview of the most important changes:

Stepped contribution rates

In order to reduce the burden placed on major contributors, the calculation of the contribution to the Austrian Chamber of Commerce will in future be based on a degressive stepped contribution rate (basic level - first level - second level). For amounts exceeding the threshold for the first and the second level, a reduced percentage rate will apply to the calculation base (de facto, the contribution is reduced by 5% if it exceeds the threshold for the first level and by 12% if it exceeds the threshold for the second level). The first threshold must not be lower than EUR 2m, but the exact thresholds are still subject to negotiation. For the financial services sector (banking and insurance companies), different (higher) thresholds will apply.

Reduced calculation base for investments

Furthermore, input VAT incurred in connection with investments in fixed assets (from an income tax perspective) no longer needs to be included in the calculation base for the contribution to the Austrian Chamber of Commerce.

Regular contribution

The obligation to pay the regular contribution (‘Grundumlage’) will in future be linked to the allocation of the company to one or more professional bodies of the Austrian Chamber of Commerce and not to the number of commercial licences.

Rupert Wiesinger

Helene Breit

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