Global Tax Alert | 15 January 2014

Austria publishes draft bill 2014 amending Tax Acts

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On 9 January 2014, the Austrian Ministry of Finance published the 2014 Tax Amendment Act (Abgabenänderungsgesetz 2014; AbgÄG 2014), a draft bill with amendments to certain Austrian Tax Acts. The following significant changes are planned:

Limitations to the tax deductibility of interest and royalty payments to affiliated corporations

As of 1 March 2014, interest and royalty payments to domestic and foreign affiliated corporations shall no longer be tax deductible if the income of the recipient corporation (beneficial owner) is completely or predominantly not subject to taxation or taxed at a rate of less than 15%. If the tax rate is at least 10% (but less than 15%), half of the expenses are tax deductible. An exception shall apply for payments to entities that meet the EU law privileges for risk capital measures. The focus of this new regulation is – in the light of the current BEPS Action Plan of the OECD – the avoidance of the intra-group transfer of profits via interest and royalty payments to low-tax jurisdictions or jurisdictions with a special tax regime.

Limitations to the group taxation regime

Abolishment of the goodwill amortization

Under the current legislation, goodwill arising from acquisitions of domestic group members has to be amortized over 15 years. According to the draft legislation, acquisitions of participations after 28 February 2014 are no longer entitled to goodwill amortization. Open amortization amounts (“fifteenths”) from the past basically remain tax deductible in the future if the tax benefit from goodwill amortization potentially had implications on the purchase price. According to the explanatory remarks to the AbgÄG 2014, it was possible that the benefit of goodwill amortization had implications on the purchase price, if both parties could assume that, when buying the participation, the buyer was without any doubt entitled to goodwill amortization.

Geographical limitation of group taxation

Under the AbgÄG 2014, certain companies shall be excluded from the group taxation regime. As of 1 March 2014, in addition to corporations resident in the EU, foreign entities resident in countries with which Austria has agreed on comprehensive administrative assistance may be included into a tax group. This is considered justified by the enforcement and control possibilities of the Austrian tax authorities.

Existing foreign group members, resident outside the EU, in countries without a comprehensive administrative assistance agreement, shall be suspended from the group tax regime as of 1 January 2015 ex lege. If, based on that rule, the three-year minimum holding period cannot be fulfilled, there shall be no reversal of group taxation tax effects. The recapture of foreign prior year losses of the suspended group members may be spread over three years.

Limitation to the set off of foreign losses

Currently tax losses of foreign group members can be utilized up to the full amount of the foreign loss. Starting with the 2015 tax assessment, the utilization of losses of foreign group members shall be limited to 75% of the domestic group income. Excess losses are included in the loss carry forwards for subsequent years.

Per person and per year limits for the tax deductibility of salaries/wages

As of 1 March 2014, the tax deductibility of salaries/wages and other remuneration (including all payments in cash and in kind) shall be limited to €500,000 per person and per year. This regulation shall apply to the lessee in the case of staff secondment. The €500,000 limitation has to be apportioned for employments of less than 12 months or when the person renders services for affiliated partnerships or business units. This regulation shall apply to employees (echte Dienstnehmer) as well as to other similar contractors who are organizationally integrated into the entity such as management board members of public companies and managing directors of Austrian limited liability companies.

The limitation also applies to severance and termination payments if the underlying salary exceeds €500,000 (group wide consideration).

Further, the tax deductibility of increases of accruals for pension and severance payments and similar payments shall also be limited. In this context the future pension must not exceed €500,000 per year. This regulation shall become effective for accruals that are made for financial years ending after 28 February 2014.

Incidental wage costs shall be excluded from this limitation of tax deductibility.

Limitations to favorable taxation of golden handshakes

In order to keep older employees in employment, the favorable taxation of golden handshakes (freiwillige Abfertigungen, Kündigungsentschädigungen, Vergleichszahlungen) shall be limited for payments after 28 February 2014. The taxation of statutory severance payments (Abfertigung alt) shall remain unchanged.

Discounting of long-term accruals

Under the current legislation, long-term accruals (remaining term of at least one year) incurred for pending losses or other liabilities are only tax deductible in the amount of 80%. The remaining 20% non-deductible amount corresponds to a lump-sum discount for which the effective term of the accrual does not matter.

This lump-sum discounting shall be abolished and replaced by a mandatory fixed discounting rate of 3.5% per year.

This amendment shall be effective for all accruals made for financial years ending after 30 June 2014. All long-term accruals made for financial years ending before 1 July 2014 shall be reversed (increasing the taxable profit) only in case (and as long as) the amount applying the new 3.5% discounting rate would result in a lower accrual amount. The reversed amount shall be spread over three years.

75% limitation to the deduction of loss carry forwards basically remains unchanged

In contrast to individuals, the 75% loss offset boundary basically remains unchanged for corporations. The 75% limitation shall not apply to recaptures of losses of foreign group members starting with the tax assessment of 2015.

Extension of limited tax liability on interest

Under the current legislation, no withholding tax is levied on interest from domestic bank deposits and debt securities of nonresidents which are not in the scope of the EU-Savings Tax, as this income is not covered by the limited tax liability. Interest on domestic bank deposits and debt securities of EU residents are however taxed with EU-Savings Tax.

As of 1 March 2014, interest on bank deposits and debt securities (specifically interest within the meaning of the EU-Savings Tax Act) received by persons not covered by the EU-Savings Tax Directive shall be covered by the limited tax liability (withholding tax deduction starting with 1 July 2014).

Minimum share capital for limited liability companies (GmbHs) increases again

With the Corporate Law Amendment Act 2013, the statutory minimum share capital for limited liability companies was reduced from €35,000 to €10,000 as of 1 July 2013. Since the annual minimum corporate income tax amounts to 5% of the statutory minimum share capital, the minimum corporate income tax decreased to €500 per year (regardless of the actual amount of the nominal share capital of a GmbH).

As of 1 March 2014 (only eight months after the decrease) the minimum share capital shall again increase to €35,000. By increasing the minimum capital, the minimum corporate income tax increases again to €1,750 per year. A reduced tax for the first four quarters of €273 per quarter shall be reintroduced.

For start-ups, the “foundation privilege,” whereby only €5,000 of the minimum share capital must be paid in cash, shall remain. Companies that make use of this

privilege, have to include an addendum into the company name (gründungspriviligiert). Founding privileged companies and companies registered since 1 July 2013 with registered capital of less than €35,000 shall be obliged to assign a quarter of their annual net income in a special statutory reserve every year to make up the difference to the amount of € 17,500 which would be payable in cash otherwise. In addition, for those companies the annual minimum corporate income tax shall amount to €1,750 per year. The founding privilege expires after 10 years at the latest.

Abolishment of capital duty from 2016

The existing 1% capital duty on equity contributions shall be abolished from 1 January 2016 onwards. Based on the Directive 2008/7/EC, it would no longer be possible in the future to reintroduce a similar tax after the planned abolishment.

The 2014 Tax Amendment Act is expected to be adopted by the Austrian Parliament in February 2014 and enter into force on 1 March 2014.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Steuerberatungs- und Wirtschaftsprüfungsgesellschaft m.b.H., Vienna
  • Andreas Stefaner
    +43 1 211 70 1041
    andreas.stefaner@at.ey.com
  • Roland Rief
    +43 1 211 70 1257
    roland.rief@at.ey.com
  • Klaus Pfleger
    +43 1 211 70 1179
    klaus.pfleger@at.ey.com
  • Markus Stefaner
    +43 1 211 70 1283
    markus.stefaner@at.ey.com
  • Dominik Novak
    +43 1 211 70 1303
    dominik.novak@at.ey.com
  • Patrick Plansky
    +43 1 211 70 1142
    patrick.plansky@at.ey.com

EYG no. CM4103