AUSTRIA Law and Practice Contributed by: Clemens Philipp Schindler and Mohamed Hemdan, Schindler Attorneys
Moreover, the CFC rules described in 6.5 Controlled Foreign Corporation-Type Rules only apply where the controlled foreign subsidiary does not conduct “sub - stantial economic activity” supported by staff, equip - ment, assets and premises. Thus, it would be possible to avoid the attribution of such foreign passive income (and taxation in Austria) by providing evidence of such “substantial economic activity” supported by staff, equipment, assets and premises (ie, the so-called substance test). Nonetheless, beyond the CFC rules, Austrian tax law generally incorporates a substance-over-form approach in relation to foreign subsidiaries of Aus - trian corporations, under which, in cases of wholly artificial or abusive arrangements, the income of the foreign subsidiary may be attributed to the Austrian parent corporation. 6.7 The Sale of Shares in Non-Local Affiliates The gains made by local corporations on the sale of shares in non-local affiliates are tax exempt where the conditions mentioned in 6.3 Dividends From For- eign Subsidiaries are met ‒ namely, a minimum par - ticipation in the foreign subsidiary (which needs to be comparable to an Austrian corporation or an entity enumerated in the Annex to the EU Parent-Subsidiary Directive) of at least 10% and a holding period of one year without interruption. It is also possible to opt for the tax effectiveness of the participation in the corporate income tax return for the year in which the participation is acquired, but this option is irrevocable.
• more than a third of the controlled entity’s profits stem from low-taxed passive income. “Passive income” is defined as: • interest or any other income generated by financial assets; • royalties or any other income generated from IP; • dividends and income from the disposal of shares, insofar as they would be taxable; • income from financial leasing; • income from insurance, banking and other financial activities; or • income from invoicing companies that earn sales and service income derived from goods and ser - vices purchased from ‒ and sold to ‒ associated enterprises and which add little or no economic value. The income is considered low-taxed if it is taxed at an effective tax rate that does not exceed 15%. The CFC rules also apply to foreign permanent estab - lishments, as with foreign controlled subsidiaries of Austrian parent corporations, provided the aforemen - tioned conditions are met. Austria also has a so-called switch-over rule for divi - dends distributed from low-taxed subsidiaries to Aus - tria. Pursuant to this rule, received dividends will not be subject to the participation exemption but ‒ under certain conditions ‒ will be subject to regular corporate income tax, and the tax levied in the source state will be credited (ie, a switch from exemption method to credit method). The switch-over rule does not apply if the passive income has already been covered by the aforementioned CFC rules. 6.6 The Substance of Non-Local Affiliates In order to obtain relief at source for dividend pay - ments received (under the EU Parent-Subsidiary Directive) by a foreign affiliate from an Austrian corpo - ration, the foreign corporation must meet specific sub - stance requirements, such as carrying out an active trade or business and having employees or business premises. Please also see 4.1 Application of With- holding Taxes .
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
Section 22 of the Austrian Federal Fiscal Code pro - vides for a general anti-avoidance rule that applies in the case of abusive tax structures. Tax planning may reach a point beyond which it can - not be tolerated ‒ ie, where transactions are entered into, or entities are established, solely for the purpose of obtaining special tax advantages. A legal structure is inappropriate or unusual and therefore an abusive
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