Austria types of company

The Austrian government's decision to reduce the corporate tax rate from 34% to 25% from 2005 led to a 30% increase in successfully concluded investment projects.

In addition to the corporate tax cut to one of the lowest levels in the EU, the reforms also contained a number of measures designed to reduce the tax burden on multinational firms using Austria as a base for regional headquarters. Austria offers significant fiscal concessions to corporates through holding companies, foundations and some tax-privileged investment incentives.

AUSTRIAN HOLDING COMPANIES

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Austria, while not having the worst EU holding company regime, is by no means the most attractive country in which to set up a holding company.

A new group taxation regime, brought in along with a reduction in corporate taxation from 34% to 25% in 2005, allows the offsetting profits and losses of group operations (requiring direct or indirect participation of more than 50%, but no other financial, economic or organizational integration) in Austria and abroad. This new group taxation system should offer interesting opportunities for foreign investors, in particular joint-venture structures, M&A transactions, headquarter companies and simple holding companies without active business, which can also participate in the tax group.

Withholding Taxes on Incoming Dividends

As a member of the EU, Austria is governed by the provisions of the EU's Parent-Subsidiary directive, whose effect is that where an Austrian holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 24 months any dividends remitted by the EU subsidiary to the Austrian holding company are free of withholding taxes.

Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place) Austrian holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Germany from the subsidiary jurisdiction.

Austria has more than 50 double taxation treaties in place. (Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

Corporate Income Tax on Dividend Income Received

Income received by Austrian holding companies from foreign subsidiaries is subject to the standard rate of Austrian corporate income tax unless the Austrian holding company meets the criteria known as the "International Participation Exemption rules" in which case a special fiscal regime applies. To qualify for the fiscal benefits flowing under the "international participation exemption rules" the Austrian holding company must meet the following 4 criteria:

Corporate Form: The foreign subsidiary must be a corporate body as per the definition set out in the EU Parent-Subsidiary directive whereas the Austrian holding company must be a corporate body as per the definition set out in national laws.

Direct Shareholding: The Austrian holding company must directly own the shares in the foreign subsidiary. If the dividend income is dividend income from a subsidiary of the foreign subsidiary then the international participation exemption criteria are not satisfied.

25% Shareholding: The Austrian holding company must hold a minimum of 25% of the shares of the foreign subsidiary.

24 Months Time Period: The Austrian holding company must hold its 25% shareholding in the foreign subsidiary for a minimum period of 24 months prior to the distribution of dividend.

Dividend income paid by a foreign subsidiary to an Austrian holding company which meets the "international participation exemption rules" is treated in one of two ways:

The Exemption Method: Under the exemption method no further tax is payable in Austria on the dividend income received irrespective of how much tax was paid in the foreign jurisdiction.

The Credit Method: Under the credit method the dividend income received in Austria is assessed to Austrian tax but any tax paid in the foreign jurisdiction is credited against the final Austrian corporate tax liability. If the foreign tax exceeds the Austrian tax so that there is a tax credit in Austria this tax credit cannot be carried forward in the balance sheet and set off against future tax liabilities arising in Austria.

Clearly the exemption method is preferable. The credit method however automatically applies if the following conditions of anti-avoidance legislation are saatisfied:

Passive income: The foreign subsidiary's main source of income is "passive income" (interest, royalties, rental and lease income, capital gains from the disposal of shareholdings).

Holding Company Ownership: More than 50% of the holding company's shares are owned by Austrian tax residents.

Low Foreign Tax: The corporate income tax paid by the subsidiary in the foreign jurisdiction on the profits out of which dividends are paid is less than 15%. (N.B. Dividend income received by an Austrian holding company from a resident subsidiary is exempt from corporate income tax in Austria and is subject to considerably less stringent criteria than the requirements applying to dividend income received by an Austrian holding company from a foreign subsidiary. Thus for example there is no minimum percentage shareholding requirement, no minimum time period requirement and no requirement that the shareholding should be direct).

Capital Gains Tax on the Sale of Shares

In Austria capital gains are taxed as corporate income. Capital gains made by an Austrian holding company on the profitable sale of its shareholding in a foreign subsidiary are subject to the standard rate of Austrian corporate income tax unless the Austrian holding company meets the criteria known as the "International Participation Exemption rules."

To satisfy the "international participation exemption rules" for capital gains purposes a holding company must meet the following 3 conditions:

Corporate Form: The foreign subsidiary must be a corporate body as per the definition set out in the EC Parent-Subsidiary directive whereas the Austrian company must be a corporate body as per the definition set out in its national laws.

25% Shareholding: The Austrian holding company must hold a minimum of 25% of the shares of the foreign subsidiary prior to the sale of those shares. 24 Months Time Period: The Austrian holding company must hold the 25% shareholding in the foreign subsidiary for a minimum of 24 months prior to the sale of the shares.

Where however the foreign subsidiary – Austrian holding company structure falls foul of Austrian anti-avoidance legislation (see above) the "international participation exemption rules" are suspended and any capital gains made on the profitable disposal of shares in the foreign subsidiary would be treated as corporate income and subject to standard Austrian corporate income tax at 25% (N.B. Capital gains realized by an Austrian holding company on the profitable sale of shares in a resident subsidiary are subject to standard Austrian corporate income tax rates).

Withholding Taxes on Outgoing Dividends

There is a standard rate of 25% for withholding taxes on outgoing dividends. This amount can only be reduced in 2 circumstances:

Where the parent corporation to which the dividends are remitted by the Austrian holding company is resident in another EU territory and holds at least 25% of the Austrian holding company's shares for a minimum period of 12 months prior to the dividend distribution. (N.B. Austria has anti-avoidance provisions aimed at non-EU parties attempting to benefit from the terms of the directive). Where the ultimate parent corporation is located in a jurisdiction with whom Austria has a double taxation treaty then the rate is generally reduced from the standard rate of 25% to a reduced rate of between 0-15%. Austria has more than 50 double taxation treaties.

Austrian v Danish Holding Companies

Since Denmark is currently the benchmark holding company jurisdiction which other holding company jurisdictions seek to emulate a comparative assessment of the two jurisdictions is a useful exercise.

As members of the EU, and with approximately equal numbers of double tax treaties, the two countries are equivalent in terms of the imposition of withholding taxes by the jurisdiction from which a dividend emanates. Withholding Taxes on Incoming Dividends:

As both Austria and Denmark are members of the EU both are bound by the terms of the Parent-Subsidiary directive under which dividends remitted from an EU subsidiary to an EU parent corporation which has held 25% of the subsidiary shares for a minimum period of 24 months are free of withholding taxes. So in this respect neither has an advantage over the other.

Where the EU Parent-Subsidiary directive does not apply the only means of reducing withholding taxes levied on incoming dividends remitted by the foreign subsidiary to the holding company is through double taxation treaties. Denmark has 78 double taxation treaties in place whereas Austria has 43 meaning that Denmark has considerably more scope than Austria for the reduction of withholding taxes on incoming dividends.

Corporate Income Tax on Incoming Dividends:

In Denmark dividend income received by a Danish holding company is exempted from corporate income tax irrespective of the jurisdiction in which the foreign subsidiary is located, provided that the Danish holding company meets the "participation exemption criteria" in that for a minimum period of 12 months prior to the dividend distribution it holds at least 20% of the shares of the foreign subsidiary (which subsidiary must not be deemed a "Controlled Foreign Corporation"). In Austria by comparison "the international participation exemption rules" only apply if 25% of the foreign subsidiary shares have been held by the Austrian holding company for a minimum period of 24 months.

Austrian anti-avoidance provisions are not severe, but Denmark is more permissive, having no minimum tax rate hurdle for taxation in the originating jurisdiction in any circumstances.

Accordingly in terms of corporate income tax levied on incoming dividends the Danish holding company is a considerably more flexible entity than its Austrian counterpart.

Capital Gains on the Sale of Shares:

A Danish holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held the foreign subsidiary's shares for a minimum period of 3 years prior to the disposal and the foreign subsidiary is not a "Controlled Foreign Corporation". An Austrian holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held at least 25% of the foreign subsidiary shares for a minimum period of 2 years prior to the disposal and the income of the foreign subsidiary is not deemed "passive income".

However the crucial distinction in favor of Denmark is that in Austria anti- avoidance legislation suspends the capital gains tax exemption where the foreign subsidiary is located in a low tax or offshore jurisdiction such as Hong Kong or Gibraltar respectively.

Once again this makes the Danish holding company a considerably more flexible entity than its Austrian counterpart albeit the fact that the Danish participation exemption criteria are marginally harder to meet.

Withholding Taxes on Outgoing Dividends:

The standard rate of withholding taxes levied in Denmark on outgoing dividends is 28%. This rate can be reduced by both the provisions of a double taxation treaty and by the provisions of the EC Parent-Subsidiary Directive.

Alternatively where the dividends are remitted by an intermediate Danish Holding Company to a foreign parent corporation no withholding taxes are deducted provided that there is a double tax treaty in force between the two countries, and:

The foreign parent corporation holds a minimum of 20% of the shares in the intermediate Danish holding company. (N.B. If the shareholding is less than 20% then the double tax treaty rate will apply);

The parent corporation is non-resident; and the shares must have been held by the parent corporation for a minimum continuous period of at least 12 months (if the shareholding is 20% but the shares have not been held for 12 months then a withholding tax rate of 28% will be levied on 66% of the dividend income making an effective rate of 18.3%).

In Austria either reduced or no withholding taxes are levied on outgoing dividends provided that either the EU parent/subsidiary directive applies (in which case no withholding taxes are levied) or alternatively provided there is a double taxation treaty in place (in which case withholding taxes are reduced from the standard rate of 25% to between 0-15%). Austria has 43 double taxation treaties in place.

Once again this makes the Danish holding company a considerably more attractive entity than its Austrian counterpart.

AUSTRIA PRIVATE FOUNDATIONS

Private Foundations

The private foundation (Privatstiftung) is the civil law cousin of the common law trust. A grantor must endow the Privatstiftung with assets of at least EUR 70,000 in the form of cash or in kind. If capital is raised as a contribution in kind, an audit is required.

In Austria private foundations which meet certain criteria enjoy a number of fiscal advantages:

i) Tax on Transfer of Assets:

A capital transfer tax of 5% (plus 3.5% in the case of real estate) is payable on the value of assets transferred into a private foundation. This capital transfer tax rate is considerably less than the tax rates applied under the Austrian gift and inheritance laws which otherwise govern the transfer of assets by way of donation. (N.B. If the assets are not retained in the private foundation for a minimum period of 10 years then normal rates of gift or inheritance taxes are levied retrospectively).

ii) Tax on Income Earned:

Private foundations are considered corporate entities for tax purposes and therefore subject to corporate income tax at the standard rate of 25%. However unlike other corporations they benefit from a number of fiscal advantages:

Dividend Income: Dividend income received by a private foundation on a shareholding held in a resident or non-resident corporate entity is exempted from corporate income tax in the hands of the private foundation. (In Austria dividend income received by a resident corporation from a non-resident corporation is only exempted from corporate income tax if certain strict criteria can be met, namely that the resident corporation has directly owned 25% of the shares in the non-resident corporation for a minimum period of 24 months). However, the international participation exemption for dividend income is only applicable in cases in which foreign withholding taxes have not been reduced under a tax treaty.

Interest Income and Capital Gains: Interest income from bank deposits, bonds or mutual funds as well as capital gains from the disposal of substantial shareholdings, i.e. 1% or more, are subject to a 12.5% tax rate. Such tax will be credited against withholding tax on distributions to beneficiaries. (In Austria capital gains are taxed as corporate income and resident corporate entities are not exempted from corporate income tax on the profitable disposal of shares in a resident entity).

iii) Tax on Income Distributed:

Income distributed by the private foundation is subject to a final withholding tax of 25% whether the recipient is an individual or a corporation, and this may be reduced by tax treaties. Thereafter no taxes are payable by the recipient. If however the recipient is an individual with a lower marginal tax rate part of the withholding taxes may be re-claimed. Where the recipient is a corporate entity no reclaim can be made but since the rate of corporate income tax is 25% and no more taxes will be levied on the income distributed this fiscal treatment potentially represents a substantial fiscal concession. (N.B. A foundation is not allowed to carry on business, agricultural or forestry activities (except as sideline activities) nor to take over the management of or assume personal liability for a partnership).

AUSTRIA VENTURE CAPITAL FUNDS

Venture Capital Funds

Venture capital funds are companies whose purpose is to invest in, promote and develop other corporate entities (provided those entities are not involved in the provision of financial services). This is usually achieved through the venture capital fund taking a participating shareholding in the target company.

The venture capital sector in Austria is relatively undeveloped. Funds created under the existing tax-privileged mutual fund structure (known as 'participation funds') are only allowed to acquire shares or other instruments which are quoted or traded on a generally recognised securities market, and securities of any one issuer may be purchased only to the extent of 10% of the fund’s assets.

Such venture capital activity as has taken place has primarily used the Mittelstandsfinanzierungs-gesellschaft, or MFAG. It is a stock company structure, which is subject to corporate tax relief and some additional but minor tax reliefs, and it has various restrictions on investment activity. For example, just 30 per cent of funds raised can be invested in foreign companies, no investment in financial services nor power generation is permitted and just 49 per cent of a company can be bought by a single MFAG.

The FGG (Finanzierungsgarantie-Gesellschaft) is a financial institution owned by the Republic of Austria which assumes business risks on the basis of its appraisal of the potential of the company or project in question. The aim of the programme is to facilitate the start-up and expansion of technology–orientated SMEs by offering guarantees to venture capital funds who are investing in these firms.

The FGG enters into a general guarantee agreement with a venture capital fund over a certain amount of equity capital if the fund meets certain requirements (long-term investment, quality of management ...). Criteria for approval of equity investments are the future earning potential and the management capabilities of the enterprise in question. If the FGG agrees to a new investment, the FGG secures 50% of the paid-in capital. The guarantee can be drawn by the venture capital provider at any time. Additionally the FGG offers sureties for a loan up to the paid-in capital.

AUSTRIA SPECIAL CORPORATE INCOME TAX REGIMES

Corporate Income Tax Regimes

Investment Allowances

The investment allowance (Investitionsfreibetrag), which used to be the most common tax incentive, was abolished as of 2001.

Tax incentives still available under the Austrian tax law include:

Research & Development Investment Allowance Deductions An additional tax deduction of 25% is granted for expenditure incurred on research. If the research expenditure for a year exceeds the average expenditure in the preceding three years, the percentage of the additional deduction for the amount of the excess is 35%.

Thus a company spending US$3m per annum on allowable research and development could find itself deducting US$3.75m or $4.05m from profits for the purposes of an assessment to corporate income tax. Clearly this provision represents a substantial fiscal concession.

The concession applies to expenditure on research and development of economically viable inventions. To qualify for the allowance the invention must have a certificate from the Ministry of Economic affairs unless it is already protected by patent. This is to certify that the invention is of economic value and not just a means of reducing taxable income.

The allowance does not cover all research and development expenditure. The expenditure must be directly related to research and therefore only covers expenditure incurred on raw materials, staff wages or other auxiliary materials. It does not cover expenditure incurred on fixed assets (e.g. the purchase of machinery) or expenditure incurred on administrative activities (e.g. the employment of an accountant). Research undertaken under a contract on behalf of third parties is covered by the allowance.

Credit Institutions Financing SME and Business Start-Ups

Qualifying Preconditions

Institutions providing credit to business start-ups & small and medium sized enterprises are subject to a special corporate income tax regime. In order to achieve this status a company must meet the following criteria: The business objects of the credit institution must be limited to loans secured by participating shareholdings.

At least 75% of the target companies in which the credit institution invests must be based and resident in Austria.

The credit institution's balance sheet must be audited annually and comply with the following criteria:

Minimum Share Capital: The minimum share capital of the credit institution is EUR7,000. For the first 5 years after its setting-up not more than 30% of the credit institution's share capital can be owned by other credit institutions. Participating Shareholdings in Target Companies: Not more than 70% of the credit institution's share capital must be represented by participating shareholdings in target companies. Furthermore the participating shareholding which the credit institution holds in the target company must not be a majority shareholding.

Other Assets: Other than participating shareholdings in target companies the balance of the credit institution's assets must be made up of money deposits, fixed interest securities or loans to other credit institutions. Fiscal Incentives

A credit institution which qualifies as a credit institution which advances loans to SME and business start-ups is exempt from corporate income tax on profits for a period of 5 years.

Roll-Over Relief

Austria allows roll-over relief for capital gains from the disposal of fixed assets (except investments in subsidiaries) that have been held for a minimum of seven years (15 years in case of real estate). However, capital gains from the disposal of an intangible may only be rolled over to the acquisition of an intangible, and a similar rule applies to capital gains from the disposal of tangible assets.

AUSTRIA BUSINESS INVESTMENT INCENTIVES

Business Investment Incentives

Austria offers a comprehensive system of both national and local incentive programs. The incentives available for a specific project vary, depending on the geographic location, the number of jobs created, the technology used and various other factors. Even the range of incentives is wide: from cash grants and low interest loans to export guarantees. Therefore individual consultations are required to determine the available incentives. Austria, however, must not grant subsidies in excess of the level accepted by the EU.

Incentive Cash Grants

Jobs must be created in economically depressed areas. Companies invest a negotiated amount for each job created and the employment must last for at least 3 years.

Grants for company premises, machinery and equipment are not taxed as income; Grants or subsidies to create or maintain jobs may be tax free depending on circumstances.

The Tax Reform Act 2000 provided for a substantial enhancement of the tax incentives for R&D. After the reform, Austria is among the most generous countries with respect to tax incentives to R&D. Within the framework of the Tax Reform 2000 the allowance for research expenditures in connection with “economically valuable” inventions was increased from 18% to 25% (maximum) and the allowance for additional research expenditures (over and above a moving average of the expenditure over the past three years) was increased to 35%. The aim of this new regulation is to give incentives to increase R&D expenditures; positive effects on the whole economy are expected, especially concerning Productivity and Job Creation.

Until 2006, 41% of Austria’s land area is eligible for support under various EU structural fund programs. The Austrian federal, provincial, and local governments also provide financial incentives within EU guidelines to promote investments in Austria. Incentives under these programs are equally available to domestic and foreign investors, and range from tax incentives to preferential loans, guarantees and grants. Most of these incentives are available only if the planned investment meets specified criteria (e.g., implementation of new technology, reducing unemployment, etc.).

Tax allowances for advanced employee training and R&D expenditures are available. The government has merged various institutions providing financial incentives into a “one-stop shop” named the Austria Wirtschaftsservice (further information, in German language only, is available under http://www.awsg.at and http://www.foerderportal.at).

The Innovation & Technology Fund

Grants are given up to a maximum of 50% of project costs for technology transfer, IT costs, transport projects, software engineering or energy projects.

Loans

European recovery programme (ERP)

SMEs are offered subsidised loans (2-4% benefit) for up to 70% of investments made into environmental protection technology and for some other purposes; both tangible and intangible assets are covered.

The ERP Fund will prepare a package of subsidies for investors tailored to individual planned investment: ERP Fund Renngasse 5 A-1019 Vienna Tel: 00 43 1 53464 x 4000

Research and Technical Development

The Research Promotion Fund for Industry and Commerce offers support for R & TD Projects up to 50% of the project in the form of a combination of loans and grants. Applicants must show that the project will improve the structure and productivity of the Austrian economy.