Taxation of passive income of “low-taxed” entities

AUSTRIA - Taxation of passive income of “low-taxed” entities

September 2019

With effect from 1 January 2019, new provisions concerning the taxation of passive income of “low-taxed” entities came into force in Austria. The provisions introduced a controlled foreign corporation (CFC) regime for the first time into the Austrian domestic law. The new regulations allow a reallocation of income of subsidiaries in “low tax” jurisdictions to the Austrian parent company. The reallocated income is subject to the Austrian corporate income tax at a rate of 25 %. Any foreign taxes paid can be credited against the Austrian tax.

CFC rules

The CFC rules apply to Austrian corporations holding a “controlling interest” (more than 50% of voting rights, capital or dividend rights, either alone or together with associated enterprises) under two conditions:

  1. More than one-third of the foreign subsidiary’s income is passive. Passive income includes:
    • Dividends and capital gains from the sale of participations if they would be taxable at the level of the participating entity, interest, royalties, and financial leasing fees
    • Income from insurance, banking or financial activities
    • Income from “invoicing companies”.
  2. The effective foreign tax rate does not exceed 12.5%. The income of the foreign company must be calculated in accordance with Austrian tax principles in order to allow a comparison to the foreign tax actually paid.

The CFC rules do not apply if the controlled foreign company conducts “substantial economic activity” supported by staff, equipment, assets, and premises. This exemption will apply to both EU and third-country resident subsidiaries (and permanent establishments).

As well as the regulation to tax profits of low taxed foreign subsidiaries with passive income, Austria amended its existing regulations for the taxation of dividends and capital gains from “low tax” passive participations.  

These dividends and capital gains derived from “low tax” passive participations of at least 5% do not fall under the tax exemption regulations in Austria but are considered as “normal” taxable profit, taxed with corporate income tax at 25 %.  Provided certain conditions are met, foreign taxes paid can be credited against the Austrian tax amount. However, this so-called switch-over rule will not apply to the extent that profits of foreign subsidiaries have already been included in the Austrian tax basis under the CFC regime.

Stephanie Novosel

Reinhard Rindler