Austria has raised its “low taxation” threshold to 15% for purposes of applying its anti-abuse rules. The amendment primarily affects the controlled foreign company (CFC) rules, the switch-over clause and the limitations on the deduction of interest and royalty payments made to low-taxed related parties. The adjustment of the threshold aligns Austrian law with the Pillar Two minimum tax standard and brings a broader set of foreign subsidiaries and cross-border arrangements within the scope of the rules.
While the interest and royalties deduction under Section 12(1)(10) of the Corporate Income Tax Act (CITA) is an Austrian-specific rule, the CFC rules and the switch-over clause were introduced pursuant to the EU Anti-Tax-Avoidance-Directive (ATAD) and are codified in CITA Section 10a.
The amendments to Section 10a apply to fiscal years beginning after 31 December 2025 and the changes to Section 12(1)(10) apply to expenses incurred after the same date. For corporations with a calendar year fiscal year, the revised rules apply beginning in 2026. No other substantive changes were made.
Under Austria’s CFC regime, the income of a foreign subsidiary must be included in the taxable income of an Austrian parent company if:
Certain income—principally tax-exempt dividend income and capital gains—becomes taxable in Austria if the foreign subsidiary:
Austria disallows the deductibility of interest and royalty payments made to foreign associated enterprises if the corresponding income is not taxed or is low-taxed in the recipient’s jurisdiction. Low taxation is deemed to exist if any of the following is present:
Raising the low-taxation threshold to a uniform 15% materially tightens Austria’s anti-abuse framework. Austrian-resident companies with foreign subsidiaries should reassess the effective tax burden of their foreign entities and review existing and planned intragroup financing and licensing structures. Ongoing monitoring of foreign tax positions and group structures is essential to identify potential exposure under the revised CFC rules, switch-over clause and deduction limitations.
Stephanie Novosel-Schreiner
Viktoria Oberrader
BDO in Austria
Background
While the interest and royalties deduction under Section 12(1)(10) of the Corporate Income Tax Act (CITA) is an Austrian-specific rule, the CFC rules and the switch-over clause were introduced pursuant to the EU Anti-Tax-Avoidance-Directive (ATAD) and are codified in CITA Section 10a.The amendments to Section 10a apply to fiscal years beginning after 31 December 2025 and the changes to Section 12(1)(10) apply to expenses incurred after the same date. For corporations with a calendar year fiscal year, the revised rules apply beginning in 2026. No other substantive changes were made.
Controlled Foreign Company Rules
Under Austria’s CFC regime, the income of a foreign subsidiary must be included in the taxable income of an Austrian parent company if:
- The Austrian parent holds a controlling participation, i.e., it holds directly or indirectly more than 50% of the shares in the foreign company or foreign permanent establishment.
- The foreign entity derives predominantly passive income, with “predominantly” meaning that more than one-third of the foreign company’s total income consists of passive income. Passive income includes interest, royalties, license fees, finance lease income, and income from banking and insurance companies. Dividends and capital gains are treated as passive income only to the extent they would be tax-effective (i.e., fictitious) if received directly by the Austrian parent company.
- The foreign income is low taxed. A foreign entity is considered low-taxed if its effective tax burden is below 15% (previously 12.5%), based on income calculated in accordance with Austrian tax principles.
- The foreign entity lacks adequate substance. The inclusion rule does not apply if the foreign subsidiary can demonstrate genuine economic activity supported by its own personnel, business premises and assets.
Switch-Over Clause
Certain income—principally tax-exempt dividend income and capital gains—becomes taxable in Austria if the foreign subsidiary:
- Is at least 5% owned by the Austrian company;
- Derives predominantly passive income (i.e., more than 50%); and
- Is subject to an effective tax rate of less than 15% to the extent such income has not already been captured under the CFC rules.
Limitations on the Deduction of Interest and Royalties
Austria disallows the deductibility of interest and royalty payments made to foreign associated enterprises if the corresponding income is not taxed or is low-taxed in the recipient’s jurisdiction. Low taxation is deemed to exist if any of the following is present:
- The recipient is exempt from taxation for personal or factual reasons;
- The recipient is subject to a nominal tax rate of less than 15% (previously 10%);
- The recipient is subject to an effective tax rate of less than 15% (previously 10%); or
- The tax burden is below 15% (previously 10%) due to refunds or reductions.
BDO Perspective
Raising the low-taxation threshold to a uniform 15% materially tightens Austria’s anti-abuse framework. Austrian-resident companies with foreign subsidiaries should reassess the effective tax burden of their foreign entities and review existing and planned intragroup financing and licensing structures. Ongoing monitoring of foreign tax positions and group structures is essential to identify potential exposure under the revised CFC rules, switch-over clause and deduction limitations.Stephanie Novosel-Schreiner
Viktoria Oberrader
BDO in Austria