Draft Update of the Corporate Income Tax Guidelines

08/11/21

In September 2021, the Austrian Ministry of Finance published a draft update of the Corporate Income Tax Guidelines which primarily amends the guidelines in accordance with the latest case law and legislative changes. The 2021 update especially focuses on the new Austrian interest limitation rule (implementation of Article 4 of the EU Anti-Tax Avoidance Directive, ATAD). It is expected that the final version will be published early next year. Comments on the draft CIT guidelines have been provided by Austrian tax advisors and practitioners and hence some changes may be made in the final version.

The following points outline key aspects of the Austrian Ministry of Finance’s view on the interest limitation rule (for a short overview of the interest limitation rule see here).

  • The new interest limitation rule applies to corporations or Austrian PEs for fiscal years starting after 31 December 2020. In contrast to the general application of the interest limitation rule as per fiscal year, the allowance amount of EUR 3m applies for each calendar year. An interest carryforward and an EBITDA carryforward are enacted.
  • The draft CIT guidelines contain an extensive list of expenses which are to be considered as “interest expenses” within the meaning of the Austrian interest limitation rule. This includes, for example, the finance cost element of finance lease payments, guarantee fees for financing arrangements, discounting and compounding of long-term receivables or liabilities, consulting costs related to the borrowing of funds, etc. However, interest expenses due to negative interest rates are not planned to fall under the scope of the interest limitation rule.
  • The starting point for determining the tax EBITDA is the total amount of income subject to Austrian corporate income tax (i.e. before the application of the interest limitation rule). This amount is to be increased by depreciation and amortization of fixed assets and deductible interest expenses and reduced by write-ups of fixed assets and taxable interest income. Tax-effective capital losses from the sale of fixed assets are considered as advanced depreciations and are therefore to be offset as well. Tax-effective write-ups and tax-effective capital gains on the sale of assets are to be offset a) up to the amount of the historic acquisition costs and b) only to the extent that the preceding depreciation/amortization occurred after 31 December 2020. Accordingly, write-ups and capital gains in the year 2021 are not to be taken into account when calculating the tax EBITDA.
  • Net interest expenses that incurred on loans which were concluded before 17 June 2016 are neither considered as “interest expenses” within the meaning of the interest limitation rule nor to be included in the tax EBITDA (grandfathering). Minor amendments of the loan agreement do not change the grandfathered status. However, where material changes are made to the agreements, the respective interest expense arising from the loan is to be included within the scope of the interest limitation rule. This grandfathering clause is limited in time, i.e. as per the tax assessment for 2026, all interest expenses will be subject to the new interest limitation rule.
  • If the requirements of the equity escape clause are met, net interest expenses as well as any interest carryforwards are fully deductible. This exception, however, does not apply if the requirements for the equity escape clause are met only for a short period of time, e.g. if a contribution is made just before the fiscal year-end with subsequent capital repayments or dividend distributions.
  • A taxpayer may carry forward unused interest capacity, i.e. the amount by which 30% of the tax EBITDA exceeds net interest expenses (for a maximum of 5 years; EBITDA carryforward). This applies even if net interest income was generated in the respective year or if the interest expense is already fully deductible due to the allowance.

Other items addressed in the draft guidelines:

  • For dividends paid to foreign corporations that are tax resident in an EU or EEA member state, there is an option to refund the withholding tax that cannot be credited in the country of residence of the foreign corporation. Austrian tax law limits the refund of non-creditable Austrian WHT to tax residents of EU/EEA member states. However, according to the latest case law of the Austrian Supreme Administrative Court, the refund of non-creditable WHT is – within the scope of the free movement of capital (Art. 49 TFEU) – also available for entities that are tax resident in a third country.
  • In the event of a merger of the group parent of an Austrian tax group into a non-group entity, the group parent ceases to be a member of the tax group and the tax group is terminated. For the fiscal years starting after the effective merger date, a new tax group can be formed between the surviving entity as the new group parent and the (former) group members.
  • As of 2021, lump sum bad debt allowances and lump sum provisions are recognized for tax purposes if their amount is based on a reliable estimation.

Authors: Matthias Mayer & Martina Gruber

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Editor: Eva Ebner, eva.ebner@pwc.com

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