Austria Tax: Draft Austrian tax reform bill issued
The Austrian Ministry of Finance presented a draft bill for the Tax Reform Act 2010 on 10 March 2010, which includes the introduction of a formal advance tax ruling procedure and confirms a step-up opportunity on certain conversions of a corporation into a partnership, but also would eliminate a loophole in the international participation exemption and abolish the "multi-parent" grouping concept for certain tax groups. The draft is expected to pass Parliament before the summer break.Advance tax rulings
The Austrian government intends to codify a tax ruling procedure to give taxpayers more certainty on the tax treatment of their transactions. Currently, rulings are granted on an informal basis providing protection on a "good faith" basis, but the tax authorities are not obliged to issue rulings.
The proposed bill would codify a binding advance tax ruling procedure for certain issues, including reorganizations, group taxation and transfer pricing. The competent tax office would be required to address ruling requests and issue a binding ruling in the form of a decree, which the applicant would be allowed to appeal. A ruling would be formally binding on the tax authorities provided the envisaged transaction had not been implemented before the ruling request was made and provided the facts are properly presented in the request.
Rulings also would be available on behalf of legal entities that are not yet incorporated. In such a case, the ruling would be issued to the applicant and the actual beneficiary could apply to take over the ruling within one month from the date it is registered with the Registrar of Companies.
A fee would be charged for a ruling, with the amount depending on the applicant's income, but ranging between EUR 1,500 and EUR 20,000. A flat fee of EUR 20,000 would apply to an applicant that is a member of a group of companies. If the draft bill is approved, the ruling procedure would become effective as from 1 January 2011.Tax-free profit repatriation from low-taxed passive subsidiaries
Austria's international participation exemption grants a tax exemption for dividends and capital gains on qualifying participations. However, under an anti-abuse rule known as the "switch-over" clause, the exemption is not available if the foreign subsidiary of an Austrian company is a low-taxed entity earning certain passive income. In that case, dividends and capital gains on the alienation (sale or liquidation) of the foreign subsidiary are taxed at the standard Austrian corporate income tax rate, with a tax credit granted for any foreign tax paid on the income. In certain instances, taxpayers have been able to avoid Austrian taxation of the repatriated profits by merging the foreign subsidiary into its Austrian parent company.
The draft bill would close this loophole by providing that the foreign subsidiary's net equity (not including the statutory equity) in a cross-border up-stream merger of a subsidiary falling within the scope of the switch-over clause would be treated as a deemed dividend one day after the effective date of the merger. The amendment is expected to apply to mergers undertaken on or after 30 June 2010. Affected taxpayers should undertake a review of their structures and assess any alternatives.Step-up opportunity on conversions to partnership
Certain conversions of corporations into partnerships fall within the scope of the Austrian Reorganization Tax Act and are effected at book value, both at the level of the converted entity and at the level of the shareholders to avoid triggering capital gains. However, nonresident shareholders may be eligible for a tax-neutral step-up of the Austrian tax basis of their partnership interests to fair market value upon conversion if Austria had no taxation rights with regard to the shares under an applicable tax treaty. The step-up is granted to prevent built-in gains linked to the shares from becoming taxable in Austria after the conversion into a partnership.
The draft reform bill confirms this step-up opportunity and clarifies that the step-up leads to lower capital gains if the partnership interest is alienated, but the step-up is not depreciable on an ongoing basis. This is in line with the Austrian tax authorities' position published in blind rulings.
In certain instances, utilizing this step-up opportunity may be beneficial as a preacquisition structuring, enabling the seller to offer the tax benefits of an asset deal to potential buyers while, from a legal perspective, the transaction would be treated as a share deal (i.e. no asset-by-asset transfer required).Multi-parent group taxation
The Austrian group taxation rules allow the formation of multi-parent tax groups, which, for example, facilitates tax grouping if none of the shareholders holds more than 50% of the shares and voting rights as required to form a group. To streamline administration at the tax authorities' end, the draft bill would abolish multi-parent grouping if one of the parent companies is a member of another tax group or if the multi-parent association does not head the tax group. All other features of Austria's group taxation regime would remain unchanged. For new group applications, the changes would apply as from 1 July 2010, with existing multi-parent tax groups continuing to benefit until 31 December 2012.
Introducing an advance tax ruling procedure would establish a reliable tax planning environment for taxpayers in connection with reorganizations, group taxation and transfer pricing. Taken together with existing features of the Austrian tax regime, such as the competitive group taxation regime, the international participation exemption and Austria's extensive tax treaty network, the proposed measures should make Austria even more attractive as a business location. The loopholes closed in relation to cross-border mergers and the stricter rules on multi-parent tax groups should only affect a limited number of taxpayers for which alternative tax planning strategies should be available.