Issue 65

In this issue

Direct Taxes

Brexit: Implications for Austrian income tax, new UK/Austria Double Taxation Agreement in force
by Ines Hofbauer-Steffel

Austrian Supreme Administrative Court (VwGH) denies the tax deductibility of IFRS 2 (notional) employment expenses arising from stock options granted to employees
by Matthias Kornberger

Constructive dividends vs. repayment of capital
by Martina Gruber and Nicholas Walters

Indirect Taxes

Import VAT – Who can claim a deduction?
by Rupert Wiesinger, Helene Breit and Markus Leitner

Brexit: Implications for Austrian VAT
by Rupert Wiesinger and Rene Adam

Expats

No-deal Brexit: Implications for British citizens under Austrian immigration law
by Ursula Roberts and Martina Holzer

No-deal Brexit: Implications for your cross-border employees under Austrian social insurance law
by Evelyn Kappel and Daniela Messner

Tax Facts and Figures

Brexit: Implications for Austrian income tax, new UK/Austria Double Taxation Agreement in force

Although Brexit has been postponed to a later date this year, the issue remains highly topical. As it cannot be anticipated whether a formal agreement on the terms of the UK’s departure from the EU will be reached, Austria has introduced measures that would apply in the event of a “hard Brexit”:

Double-resident UK entities with their place of effective management in Austria would be treated as EU entities until the end of 2020. This would safeguard the legal existence of such entities after Brexit for this transition period. Such entities might have the opportunity to change their legal form in an orderly way. From an income tax perspective, a grandfathering rule of this kind would avoid the risk that the tax authorities might assume a change in the legal form of the taxable entity. Without such a rule, the re-assignment of assets could lead to capital gains taxation.
It is possible that the preferential exit taxation regime would no longer apply if the UK leaves the EU without a deal. It is recommendable that any planned asset transfers to the UK be made before the effective date of Brexit. Nevertheless, the due date for deferred tax payments for a past instance of exit taxation would not change due to Brexit.
Brexit would not affect a group’s ability to balance losses of a UK group member or a UK permanent establishment against Austrian profits.
Finally, Austria has negotiated a new double taxation agreement (DTA) with the UK. This became effective in the UK from April 2019 and will become effective for Austrian taxes on 1 January 2020. The new DTA ensures that inter-company payments of dividends (at least 10% of voting power), interest and royalties will remain tax-exempt after Brexit. The new DTA also reduces the maximum tax rate for minor inter-company holdings (less than 10% of voting power) from 15% to 10%.

Ines Hofbauer-Steffel

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Austrian Supreme Administrative Court (VwGH) denies the tax deductibility of IFRS 2 (notional) employment expenses arising from stock options granted to employees

IFRS 2 requires an entity to reflect the effect of equity-settled share-based payment transactions such as the granting of stock options to employees in its financial statements and P&L statement. In the case of stock options that are either settled by issuing new shares or by granting treasury shares to employees upon vesting, the fair value of the stock options at grant date has to be recognised as a (notional) employment expense over the vesting period and credited to equity. According to the Austrian Financial Reporting and Auditing Committee (AFRAC), the IFRS 2 treatment also applies under local Austrian GAAP. As the determination of taxable income in Austria is based on local GAAP, the question arises whether such (notional) employment expenses can be treated as tax-deductible expenses for Austrian corporate income tax purposes.

On 31 January 2019, the Austrian Supreme Administrative Court (VwGH) ruled that (notional) employment expenses of this kind in accordance with IFRS 2 are not tax-deductible as the company does not incur any costs when granting the stock options. According to the decision, a tax-deductible expense may only be claimed if the stock options are settled by granting treasury shares where the respective acquisition costs of the treasury shares are higher than the strike price that has to be paid by the employees in accordance with the underlying stock option plan.

The decision referred to a purely domestic scenario in which a publicly listed company resident in Austria granted stock options to its Austrian employees. The decision does not provide any guidance on the tax treatment of expenses related to stock options granted by a foreign parent company to the employees of an Austrian-resident subsidiary if these expenses are recharged by the non-resident parent company to Austria. In such scenarios, it has to be analysed on a case-by-case basis whether the Austrian subsidiary could potentially claim such recharges as tax-deductible expenses.

Matthias Kornberger

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Constructive dividends vs. repayment of capital

Recent Austrian court rulings have addressed the question whether non-arm’s length payments to a company shareholder should be classified as constructive dividends or as repayment of capital for tax purposes.

In separate cases, the Austrian Supreme Administrative Court (VwGH) and the Austrian Federal Fiscal Court (BFG) came to conflicting conclusions when assessing the existence of a “hidden” repayment of capital. However, both decisions gave different reasoning in their technical analysis. This difference in reasoning may have tax consequences in Austria:

A distribution by way of a repayment of capital (“Einlagenrückzahlung”) is tax neutral under Austrian tax law, unless the repayment exceeds the tax book value in the shares, whereas a constructive dividend (“verdeckte Gewinnausschüttung”) is subject to 25% WHT. In order to provide evidence, the companies have been required to maintain two special tax accounts (internal financing and tax equity accounts) since 2015.

BFG (RV/7105237/2015, 28 December 2018):

A loss-making Austrian GmbH granted its grandparent company a loan (cash from a transaction). The Austrian tax office assessed this to be a constructive dividend and levied 25% Austrian WHT. In its analysis, the BFG made two notable points:

A company without profits (i.e. balance sheet profits), but only with losses, cannot pay a constructive dividend. The court argued that a distribution of profits, whether by means of an “open” dividend or by a hidden distribution of profits could only be made if profits were available in the first place. The wording of the German term “verdeckte Gewinnausschüttung” (literal translation: “hidden profit distribution”) indicates that the overall loss situation would not allow for constructive dividends.
Maintaining an evidence account is not a material legal prerequisite to demonstrate tax-neutral repayment of capital. The absence of a special tax equity account of this kind does not automatically lead to the assumption of a constructive dividend.

This case is currently pending at the VwGH. The final decision will be of interest, as the VwGH case described below implies a different outcome.

VwGH (Ra 2018/15/0037, 22 November 2018):

This case questioned the nature of a non-arm’s length payment and the Tax Office assessed it to be a constructive dividend. Unlike the BFG, the VwGH held that no profit is required for a constructive dividend to be paid – gross income during the year may be sufficient. The VwGH does not dispute that a constructive dividend always applies if there is insufficient evidence of repayment of capital.

The VwGH also seems to be stricter with regard to standards of evidence. Although the VwGH has not deemed it obligatory to maintain a tax equity account, it has clearly indicated that such an account and its entries are a strong means of proving that no taxable constructive dividend is given.

It will be interesting to see whether the VwGH repeats its view that the existence of gross income is sufficient for the payment of constructive dividends. If so, the burden of proof for a “hidden” repayment of capital could hardly be met. This implies that non-arm’s length transactions might then face 25% WHT in Austria, which may be either fully or partially refunded upon application, depending on the relevant double tax treaty or the Parent-Subsidiary Directive. We recommend carefully maintaining these special tax accounts.

Martina Gruber
Nicholas Walters

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Import VAT – Who can claim a deduction?

Under certain conditions, import VAT on goods imported to Austria can be claimed as input VAT. As it is frequently unclear who is legally entitled to deduct the import VAT, we provide a short overview here of the main points to be considered.

In order to deduct import VAT as input VAT in Austria, it is not decisive which legal entity is mentioned as recipient of the goods on the respective invoices or on the import documents. Instead, the following conditions have to be met:

The importer of the goods qualifies as a taxable person for VAT purposes and generally has a right to deduct input VAT
The import of the goods is deemed to be carried out for the business of the recipient
The importer of the goods has the right to dispose as owner of the imported goods as owner at the time of import

The decisive criterion for the deduction of import VAT as input VAT is that the importer of the goods is deemed to have the right to dispose of the imported goods as owner at the time of import and subsequently uses the goods for his own business purposes.

According to the case law of the ECJ and the Austrian Administrative Court, it is also decisive that the costs incurred in connection with the import of the goods (e.g. import VAT) are included in the price of outgoing transactions or in the price of goods supplied by the taxable person in the course of his business activities. Freight forwarders, carriers, commercial agents, etc. who are involved in the import of the goods but do not have the right to dispose of the goods as owner are thus not entitled to deduct import VAT. Even if they temporarily store the imported goods on behalf of the owner or become debtors of the import VAT, they are still not entitled to deduct import VAT as input VAT.

In determining who is deemed to have the right to dispose of the goods as owner, neither contractual agreements nor Incoterms but the place of supply rules are decisive. If the place of supply of the goods is deemed to be where the transport of the goods begins, the person to whom the goods are sold upon importation is deemed to be owner of the goods and thus entitled to deduct the import VAT. Special rules apply to installation supplies, chain transactions and toll manufacturing arrangements.

Import VAT has been paid

For import VAT deduction under the Austrian VAT Act, it is a requirement that import VAT has been paid to the customer’s authorities. Who paid the import VAT is not decisive. The Austrian tax authorities also allow the deduction of import VAT if the import VAT is paid by a third party, provided that the other conditions have been fulfilled.

If the deferment scheme is used, the import VAT will be debited from the tax account of the importer.

Additional points

The above-mentioned conditions for import VAT deduction have to be met at the time the goods are imported to Austria.

Import VAT is not deductible in cases of (suspected) fraud, i.e. if the taxable person knew or should have known that the business transaction in question or another transaction in the supply chain related to fraud.

Rupert Wiesinger
Helene Breit
Markus Leitner

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Brexit: Implications for Austrian VAT

Now that the deadline for the withdrawal of the UK from the EU (“Brexit”) has been extended to October 31, 2019, the scenario in which the UK leaves without a deal (“no-deal Brexit”) might have become less likely.

However, from a VAT perspective, the legal changes that would need to be made and thus the implications of a no-deal Brexit for supplies of goods and services can already be anticipated to a large extent.

In the event of a no-deal Brexit, the UK would become a third country from an EU perspective, which would especially affect cross-border supplies. In particular, changes to the VAT treatment and reporting obligations can be expected in the following areas:

Intra-EU supplies of goods from Austria to the UK would become export supplies of goods and would have to be reported as such (i.e. in the VAT returns, but no longer in the EC Sales List);
Intra-EU acquisitions in Austria would become imports into Austria and would have to be reported as such (i.e. no reporting of the transaction itself, but import VAT deduction in the VAT return if the general conditions are met);
The Austrian Federal Ministry of Finance has already communicated specific guidelines for cases in which the goods are in transit from Austria to the UK and vice versa at the specific moment of a no-deal Brexit;
With regard to chain transactions involving UK businesses, the triangulation simplification could only be applied in limited cases (i.e. if a UK company is registered for VAT purposes in another EU Member State and uses this VAT ID number, but the goods are neither dispatched from the UK nor transported to the UK);
The intra-EU distance sales regime (B2C) would not be able to be applied in the event of a no-deal Brexit, but the import distance sales regime would apply;
With regard to supplies of services, various changes in the place of supply would need to be considered;
MOSS would no longer be applicable to Austrian businesses for supplies of services to UK customers;
In certain cases, UK businesses would require a tax representative in Austria following a no-deal Brexit.

Given the new Brexit deadline, one of the main current uncertainties is the question as to how input VAT refund claims would be processed in the event of a no-deal Brexit, as well as what the filing deadlines for such claims would be. This applies to both UK businesses in Austria and Austrian businesses in the UK.

Moreover, future invoices might need to be adapted if there are differences in the obligatory invoice requirements (as defined in the Austrian VAT Act) for certain supplies of goods or services before/after a no-deal Brexit

Rene Adam
Rupert Wiesinger

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No-deal Brexit: Implications for British citizens under Austrian immigration law

If the United Kingdom leaves the European Union without a withdrawal agreement (and without national transition arrangements), British citizens would lose their right of residence and freedom of movement for employment purposes in Austria under European law and would have to be treated as third-country nationals.

In order to soften the effects of a possible ‘hard Brexit’, national transitional arrangements have been proposed in Austria in the form of the Brexit Accompanying Act 2019 (BreBeG).

The Brexit Accompanying Act aims to simplify eligibility requirements for British citizens and their non-EU national family members when applying for residence or work permits, as long as they were legally resident in Austria before Brexit. If an application is submitted on time (within six months after a no-deal Brexit), they would be permitted to remain and work in Austria until a binding decision has been reached by the Austrian authorities. It will be possible to obtain written confirmation from the competent authority as proof of this.

British citizens who move to Austria after Brexit would not have any advantage over third-country nationals. They would require a residence and work permit before beginning to work in Austria.

Recommended actions:

Assessment of the most suitable immigration route post-Brexit (simplified ‘Rot-Weiß-Rot-Karte plus Brexit’; ‘Daueraufenthalt – EU’ or various other options for third-country nationals).
Preparation of copies of the required documents:
Current passport; birth certificate; current passport photo; employment contract; criminal record certificate (may not be older than three months at the point of application); proof of previous legal residence in Austria before Brexit (‘Anmeldebescheinigung’ / ‘Bescheinigung des Daueraufenthalts für EWR-Bürger’; ‘Aufenthaltskarte’ / ‘Daueraufenthaltskarte für Drittstaatsangehörige Familienmitglieder von EWR-Bürgern’); potentially also proof of health insurance covering all risks, proof of appropriate accommodation, proof of sufficient financial means and proof of German language ability).

Experience has shown that the processing time for applications of third-country nationals can be up to 3.5 months from the date of submission.

Ursula Roberts
Martina Holzer

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No-deal Brexit: Implications for your cross-border employees under Austrian social insurance law

If the withdrawal agreement between the EU and the UK is not ratified, the EU regulations (Regulation (EC) No 883/2004 and Regulation (EC) No 987/2009) on the coordination of social security systems will cease to apply in the UK from the day after Brexit date. The EU regulations envisage that citizens only need to hold health insurance in one member state and they regulate the exchange of healthcare services and other social benefits between the UK and Austria.

An option that has previously been considered is to reactivate the bilateral agreement between Austria and the UK that existed before Austria joined the EU. Currently, the social insurance providers assume that in the event of a ‘no-deal Brexit’ only the national provisions of the Austrian General Social Insurance Act (ASVG) will apply. Therefore employee assignments to the UK or from the UK might be treated in the same way as employee assignments to/from states with which Austria does not have any social security arrangements (e.g. China).

A1 and S1 forms will lose their validity after exit date in the event of a disorderly Brexit.

A ‘no-deal Brexit’ would create the following risks:

Risk of social insurance costs in both the UK and Austria
Mandatory requirement to register assignees from the UK to Austria for Austrian social insurance on the day after Brexit
Employees insured in the UK who were able to access healthcare in Austria on the basis of an S1 form would no longer be able to use their e-card without taking appropriate measures and might have to pay for healthcare privately
The European health insurance card (EHIC) would no longer be valid for business travel to the UK. The costs of necessary medical treatment might have to be borne by the employer
Reciprocal arrangements between the UK and Austria for recognition of pension insurance periods to acquire entitlement to a pension would cease to apply after Brexit date. However pension insurance periods obtained before Brexit will be considered
Applications for pensions would be become more complicated because an automatic exchange of data is not guaranteed

Evelyn Kappel
Daniela Messner

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