AUSTRIA Law and Practice Contributed by: Clemens Philipp Schindler and Mohamed Hemdan, Schindler Attorneys
5.7 Restraints on Related-Party Borrowing Any borrowing between related parties must comply with the arm’s length principle. Accordingly, where a foreign affiliated company borrows funds from an Aus - trian subsidiary, an arm’s length interest amount must be allocated to the Austrian subsidiary and is subject to taxation at the level of the Austrian subsidiary. In the case of a local affiliate (ie, an Austrian sub - sidiary) receiving interest income that is not at arm’s length because the foreign affiliate applies an interest rate that is too low, the difference between the arm’s length interest rate and the actual interest rate may be deemed to constitute a hidden profit distribution subject to withholding tax (in such cases, exemptions or restrictions may apply for foreign affiliates under the general rules on dividend exemptions – eg, the Parent-Subsidiary Directive or applicable DTTs). Furthermore, to generally distinguish between a shareholder loan recognisable for tax purposes (with interest deduction) and hidden equity, the Austrian Supreme Administrative Court states that agreements between related parties are only recognised if they fulfil the following three criteria (so-called relative case law): • the agreement must be sufficiently expressed externally (in writing); • it must have unambiguous content; and • it must be concluded in accordance with the arm’s length principle, meaning on terms that unrelated parties would have agreed upon. These three criteria must be cumulatively met at the time of the conclusion of the agreement. The lack of one of these three conditions results in the tax invalid - ity of the agreement (with the consequence that inter - est is not deductible at the level of the interest-paying entity, and excessive interest paid by an Austrian sub - sidiary to its foreign affiliate is treated as a dividend payment). In addition, although Austria has no statutory thin cap - italisation rules, related-party loans may be treated as hidden equity if the Austrian company is undercapital - ised, with interest then reclassified as non-deductible dividends subject to withholding tax.
may ‒ depending on the specific treaty ‒ be prohibited from levying capital gains tax. Insofar as the sale by a non-resident concerns shares in a non-Austrian holding company that in turn holds shares in an Austrian company, such a disposal at an upper-tier level should not trigger Austrian capital gains taxation, provided that the direct shareholding in the Austrian company itself is not disposed of (in contrast to typical partnership structures). 5.4 Tax Implications of Change of Control In order to avoid the purchase of shell companies to make use of the losses saved up in a corporation, the utilisation of such losses is denied in cases where the corporation’s identity changes due to a substan - tial change in the shareholder structure against con - sideration, together with substantial changes in the management and economic structure. Thus, a change of control might result in the forfeiture of tax losses carried forward. Furthermore, RETT applies where the right to dispose of 75% or more of the shares or the accumulation of 75% or more of the shares of a corporation or partner - ship holding immovable property in Austria is trans - ferred to one acquirer or a group of acquirers. 5.5 Formula-Based Income Attribution No specific formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services. Generally, the transfer pricing methods accepted by Austrian law and the OECD Guidelines can be used to allocate income to affiliated Austrian companies; in any case, the determination must follow the arm’s length principle. 5.6 Deductibility of Intra-Group Management and Administrative Charges There are no specific rules regarding deductions for payments made by local affiliates for management and administrative expenses incurred by a non-local affiliate. However, in general, the arm’s length princi - ple and the transfer pricing rules must be taken into consideration when determining the remuneration for such services, taking into account the functions per - formed and the risks borne by the foreign affiliate.
26 CHAMBERS.COM
Powered by FlippingBook