The Austrian Participation Exemption Regime

Participation Exemptions

National Participation Exemption

Under the national participation exemption, dividends which an Austrian tax resident corporation receives through a direct or indirect participation in an Austrian corporation are exempt from Austrian corporate income tax, regardless of the extent of the participation and regardless of the length of time during which the participation in the subsidiary has been held by the parent. This exemption does not apply to capital gains.

International Qualified Participation Exemption

Under the international qualified participation exemption, dividends which an Austrian tax resident corporation receives through a direct or indirect participation in a foreign subsidiary that is an EU company listed in the Parent/Subsidiary Directive or an entity comparable to an Austrian corporation are exempt from Austrian corporate income tax. The parent must hold a participation of at least 10 per cent of the stated share capital of the subsidiary for a minimum duration of one year. The exemption is not applicable if the payment received is deductible abroad. 

The international qualified participation exemption also applies to capital gains and capital losses realised on the disposal or writing down of shares to a lower fair market value. Hence, capital gains are not taxable and capital losses are not tax deductible in connection with a sale or write-down of shares. However, capital losses resulting from the liquidation or insolvency of a non-Austrian subsidiary remain tax deductible to the extent they exceed the amount of any tax-exempt dividends received during the last five business years.

As an alternative to tax neutrality, the Austrian parent company may opt for treating all capital gains and capital losses in connection with a sale or write-down of shares as tax effective. In such cases, capital gains are taxable, while capital losses are tax deductible, but the deductible loss is spread over a period of seven years. No deduction is allowed for capital losses that were directly caused by the prior distribution of profits.

The option for tax effectiveness may be exercised separately for each participation in the corporate income tax return filed for the year in which the participation is acquired. Once the option has been exercised, it cannot be withdrawn.

International Portfolio Participation Exemption

Under the international portfolio participation exemption, dividends are exempt from tax when received by an Austrian tax resident corporation through a direct or indirect participation in a foreign subsidiary. The subsidiary must be an EU company listed in the Parent/Subsidiary Directive or an entity that is comparable to an Austrian corporation. In such latter case, the entity must be resident in a state with which Austria has an in effect an agreement for the comprehensive exchange of tax information. The exemption under the international portfolio participation rules applies when the international qualified participation rules are inapplicable. The exemption is not applicable if the payment received is deductible abroad. This exemption does not apply to capital gains.

Controlled Foreign Company (CFC) Rules

Prerequisites

Under the Austrian CFC rules, passive income of a foreign low-taxed subsidiary will be included in the tax base of the controlling corporation under certain circumstances.

Passive income encompasses the following types of income:

• Interest or any other income generated by financial assets.
• Royalties or any other income generated from intellectual property.
• Dividends and income from the disposal of shares, insofar as these would be taxable at the level of the controlling corporation.
• Income from financial leasing.
• Income from insurance, banking and other financial activities.
• Income from invoicing companies that earn sales and services income from goods and services purchased from, and sold to, associated enterprises and that add no or little economic value.

A foreign company is low-taxed if its effective foreign tax rate is not more than 12.5 per cent. In order to determine the effective foreign tax rate, the foreign company’s income is to be calculated in line with Austrian tax rules and the foreign tax actually paid is divided by the income computed in that manner.

Low taxation is additionally presumed if a foreign company is resident in one of the non-EU jurisdictions classifying as non-cooperative jurisdictions as of its closing date of the respective financial year.

The CFC rules apply if the following facts are present:

• The passive income of the CFC exceeds a third of its total income. For this purpose, the income is to be calculated in line with Austrian tax provisions, except that tax-exempt dividends and capital gains are taken into account when calculating the total income of the foreign corporation.
• The controlling corporation – alone or together with its associated enterprises – holds a direct or indirect participation of more than 50 per cent of the voting rights or owns directly or indirectly more than 50 per cent of the capital or is entitled to receive more than 50 per cent of the profits of the foreign corporation.
• The foreign corporation does not carry out a substantive economic activity supported by staff, equipment, assets and premises. For this purpose, the burden of proof is on the controlling corporation.

The CFC rules are not applicable to foreign financial institutions if not more than one third of the passive income stems from transactions with the Austrian controlling corporation or its associated enterprises.

For purposes of the CFC rules, an associated enterprise exists if:

• The controlling corporation holds directly or indirectly a participation in terms of voting rights or capital ownership of at least 25 per cent in an entity or is entitled to receive at least 25 per cent of the profits of that entity; or
• A legal person or individual or group of persons directly or indirectly holds a participation in terms of voting rights or capital ownership of at least 25 per cent or is entitled to receive at least 25 per cent of the profits of the corporation.

If a legal person or individual or group of persons holds directly or indirectly a participation of at least 25 per cent in the corporation and one or more other entities, all the entities are regarded as associated enterprises.

The CFC rules also apply to Austrian corporations having their place of management outside of Austria and to foreign permanent establishments, even if an applicable double tax treaty provides for a tax exemption in Austria.

Consequences of CFC Status

When the CFC provisions apply to a foreign corporation, the amount of the CFC’s passive income that is included in the tax base of the controlling corporation is calculated in proportion to the direct or indirect participation in the nominal capital of the CFC. If the profit entitlement deviates from the participation in the nominal capital, then the profit entitlement ratio is decisive. The passive income of the CFC is included in the financial year of the controlling corporation in which the CFC’s financial year ends. Losses of the controlled foreign company are not included.

In order to prevent double taxation, the following rules apply:

• A CFC’s passive income is not included in the tax base of a controlling corporation that holds only an indirect participation in the CFC where such passive income is already included in the tax base of an Austrian controlling corporation holding a direct participation in the controlled foreign company.
• If the controlling corporation disposes of its participation in the CFC, any capital gains are tax exempt insofar as these have previously been included in the controlling corporation’s tax base.
• When including the CFC’s passive income in the controlling corporation’s tax base, a foreign tax credit is allowed for (i) the corporate income tax imposed on the CFC regarding its passive income and (ii) the corporate income tax imposed on the CFC in connection with the passive income of a lower-tier subsidiary. Foreign tax credits are allowed upon the making of an application to the Austrian tax authorities.
• If the foreign tax to be credited exceeds the controlling corporation’s Austrian corporate income tax, tax credits can upon application also be claimed in the following years.

Switch-Over Rule

The switch-over rule overrules the exemptions for dividends and capital gains mentioned in Section 2 above. When it applies, the income and capital gains are taxable, and a foreign tax credit is given for the underlying taxes of the foreign subsidiary.

The switch-over rules apply if the predominant focus of a low-taxed foreign corporation is on earning passive income. The participation categories that are affected are: (i) participations falling under the international qualified participation exemption; and (ii) participations of at least 5 per cent falling under the international portfolio participation exemption.

The switch-over rule does not apply if passive income has been taken into account under the CFC provision mentioned above. Also, it is not applicable to foreign financial institutions if not more than one third of the passive income stems from transactions with the Austrian controlling corporation or its associated enterprises.

Dr. Niklas J.R.M. Schmidt, TEP CBP
Niklas is a partner at the firm, specialising in tax and private client work. His publications include three books on Austrian tax, as well as numerous articles in Austrian and international tax journals. In addition, he is the author of the German language introductory book "Kryptowährungen und Blockchains" (2019) and a co-editor of "Taxation of Crypto Assets" (2020), which covers the taxation of crypto assets in about 40 countries over nearly 800 pages. Niklas has been named one of Austria's top ten tax lawyers by an Austrian magazine and is ranked in band #1 by Chambers, Legal500 and other renowned directories. He has worked for several years at a "Big Four" accounting firm and has held the post of research assistant in the department of tax law of the University of Vienna.