Austrian Tax News. UFS decision concerning the use of benchmarking studies when analysing transfer prices. Merry Christmas and a Happy New Year!

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1 Austrian Tax News Merry Christmas and a Happy New Year! In this issue Direct Taxes UFS decision concerning the use of benchmarking studies when analysing transfer prices by Marianna Dozsa and Michael Reichl Salzburg Tax Dialogue 2012 by Alexandra Dolezel and Philipp Sperker Austrian tax treaties Sale of Austrian real estate companies by Guelay Karatas and Lukas Bernwieser Maintaining an equity account for tax evidence purposes for dividend distributions funded out of equity is not material for tax exemption purposes by Maria Hopfenwieser-Molzer and Bettina Karpisek Indirect Taxes Capital duty on grandparent contributions by Georg Zehetmayer and Franz Sethy Government bill on land register fee by Georg Zehetmayer and Nikolaus Kraetschmer Highlights of the Salzburger Steuerdialog 2012 VAT by Gerald Dipplinger and Roland Probsdorfer Supreme Court rulings regarding the refund of energy tax by Roman Lampel and Michael Weghofer Austrian Tax Facts and Figures UFS decision concerning the use of benchmarking studies when analysing transfer prices The Austrian Independent Fiscal Senate (UFS) concentrated intensively on the issue of the use of benchmarking studies in its decision UFSW, GZ RV 2515-W/09 concerning the determination of the arm s length distribution margin. Facts of the case A limited risk distributor based in Austria purchases trade goods from various manufacturing companies and sells the products on the local Austrian market to third party customers. The distributor is remunerated by a contracted target margin. The actual margin the distributor may earn under the arrangement is, however, limited depending on the manufacturing costs of the group manufacturers. A benchmarking study was undertaken to determine the target margin. In the course of a tax audit the tax authority only partly accepted the benchmarking study and prepared a benchmarking study on its own to check the reasonableness of the results.

2 Direct Taxes Decision of the UFS Due to the fact that basic requirements for benchmarking studies were not fulfilled, the UFS did not accept the tax authority s benchmarking study. The UFS accepted the taxpayer s benchmarking study, but also identified necessary adaptations in this study. Several aspects of the UFS decision will be relevant for the determination of transfer prices in the future. Provisions of the revised OECD Transfer Pricing Guidelines, published in July 2010, are valid for previous periods insofar as they clarify and do not alter the meaning of the 2005 OECD Transfer Pricing Guidelines. An arrangement cannot be considered arm s length where, due to group strategy, a distribution company has to accept losses for years without renegotiating the purchase price or breaking off the distribution relationship. Benchmarking analyses, where quantitative screenings are used and an independence rate of only 50% is given, can be applied as a plausibility check, but cannot be relied upon for the determination of transfer prices. The whole range of the available and accessible financial data on comparables, available at the time of the analysis, should be considered in the benchmarking study. The use of the full or the interquartile range of results depends on the quantity and the level of comparability of the potential comparables. A small sample (six companies in the case of the decision) does not meet the requirements of there being a sufficient number of observations for statistical analysis, hence the full range of results may be used. The arm s length range determined using the benchmarking analysis should be used to test the actual margins achieved by the distributor and not the planned target margins. In case the results of the tested party fall below the arm s length range in some years, it is appropriate to correct the results of those years only, according to the UFS. It is therefore not required to correct the results of the entire period under review if there are years where the results are within the arm s length range. Conclusion Based on the current UFS judgment a comprehensive documentation of the benchmarking analysis, including the calculation of the arm s length range, is essential. Additionally, the parameters and criteria used have to be considered carefully in each individual case. This UFS decision will be used as additional guidance for decisions regarding benchmarking studies in the future, for example by confirming the importance of a qualitative analysis of potential comparables. The judgment also demonstrates significant flexibility to fit the benchmarking approach to the facts of the particular case. In this specific case, the UFS used the median for the adjustment for every single year in which the company s result was out of range. This was done mainly because of the insufficient comparability of the benchmarking study presented by the group distribution company. Based on this background, we believe that the use of the median as the basis for adjustments may not always be appropriate. marianna.dozsa@at.pwc.com michael.reichl@at.pwc.com Salzburg Tax Dialogue 2012 Austrian Ministry of Finance on withholding tax on interest payments indirectly secured by Austrian real estate and on the issuance of tax certificates of residence in case of secondary residence in Austria Withholding tax liability for interest payments to a Monacan shareholder regarding a loan indirectly secured by Austrian real estate In the case discussed, a Monacan individual receives interest on a subordinated loan granted to his Austrian wholly owned subsidiary. The company is in negative equity and owns real estate located in Austria. The shareholder loan is neither secured by a mortgage nor even a pre-approved mortgage (Pfandbestellungsurkunde). According to the management of the company, there should have been no case of over-indebtedness under Austrian insolvency law due to the existence of hidden reserves in the real estate. 2

3 Direct Taxes The Austrian Ministry confirmed in a first step its previous view on the analysis to be carried out as to whether such loan is to be classified as debt or rather as equity from a tax perspective (proper documentation, arm s length set-up from an overall point of view). In the latter case, interest expenses would not be tax deductible at the level of the company and the interest payments would be reclassified as dividend payments to the shareholder subject to Austrian withholding tax. If the instrument is qualifiable as debt, any non-arm s length interest payments would be classifiable as either hidden dividend distributions (above arm s length) or capital contributions (below arm s length). In a last step, it has to be analysed whether the loan is directly or indirectly secured by Austrian real estate, which, if applicable, triggers Austrian income tax upon the interest payments (as no double tax treaty exists with Monaco which could eliminate the related Austrian taxation rights). In the given case, according to the Austrian Ministry of Finance, the loan has to be deemed to be indirectly secured by Austrian real estate as a sole shareholder of an Austrian GmbH has sufficient influence and may always enforce an alienation of the real estate by its subsidiary in order to ensure a collectability of his debt. This view of the Ministry confirms its similar statements made in EAS 3033 as of 21 January 2009 in a case where also indirect shareholders (owning shares via a German partnership) were deemed to be in a position to enforce a sale of Austrian real estate to allow for a repayment of the debt owed to them. This view should hold true irrespective of whether the debt is subordinated or not. Certificate of residence in case of secondary residence in Austria The Austrian Ministry of Finance further dealt with the case of an individual receiving dividend and interest income from Swiss sources on his Austrian bank account who has a secondary residence in Austria only (and does not fulfil the simplification requirements of the Austrian Secondary Residence Decree). His main residence is in the UK, where he is taxed on a remittance basis only. This means that only income transferred to a UK bank account is subject to British income tax and, as a consequence, the double tax treaty between Austria and the UK is not applicable to any income not subject to tax in the UK (e.g. if the income is paid to an Austrian bank account). In order to benefit from any withholding tax reductions under the double tax treaty between Austria and Switzerland, the Swiss tax authorities have to be provided with an Austrian tax certificate of residence. Austria would not issue such certificate in cases where Austria is merely the secondary residence state as basically the state of the primary residence, i.e. the UK, is to provide for such reliefs under the double tax treaty between UK and Switzerland. However, in the given case Austria would not be put in the role of the secondary residence state vis-à-vis the UK as its taxation rights of the dividends and interest income are not eliminated by the double tax treaty with the UK. The Austrian bank acting as paying agent is to withhold tax at 25%. A tax credit of Swiss withholding tax on dividends at 15% is basically possible; according to Art 11 of the Double Tax Treaty with Switzerland, Switzerland is not, however, entitled to tax the interest income. alexandra.dolezel@at.pwc.com philipp.sperker@at.pwc.com Austrian tax treaties Sale of Austrian real estate companies Ministry of Finance does not always follow the view taken by the OECD The Austrian Ministry of Finance recently issued two letter rulings (EAS 3301 and EAS 3300) which focused on the taxation of capital gains out of the sale of Austrian real estate owning companies. According to the first short letter ruling, issued by the Austrian Ministry of Finance, German resident shareholders sold their stakes in an Austrian GmbH mainly owning Austrian real estate. Under Art 13 (2) of the Austria Germany tax treaty, capital gains upon the sale of shares in such real estate companies may be taxed in Austria. Based on the underlying protocol to the tax treaty, the determination of whether such 3

4 Direct Taxes company mainly owns real estate has to be made based on the net assets shown in the most recent commercial balance sheet of the real estate company. In contrast thereto, the OECD model convention requires the determination based on the respective market value of the real estate property. In a second short letter ruling, a partnership established in Hungary sold its 100% stake in an Austrian GmbH that mainly owned Austrian real estate. The shareholders of the partnership were German residents. The activities of the partnership were limited to mere asset management. Partnerships are considered transparent for Austrian and German tax purposes. If such a partnership itself sells property, capital gains upon such sale are taxed on a pro-rata basis at the level of the underlying partners. On this basis the Austrian tax authority takes the view that in the current case the Austria Germany tax treaty should be applicable, which grants Austria taxation rights. Thus, for tax purposes, the Austrian tax authority ignores the fact that a Hungarian asset managing partnership is interposed in the structure. The current view taken by the Austrian Ministry of Finance contradicts the view taken by the OECD, which is outlined in Example 9 of the OECD partnership report. According to the OECD report, both the Austria Germany and Austria Hungary tax treaties would have to be considered in the current case at hand, irrespective of whether Austria and Germany consider asset managing partnerships to be transparent. From a Hungarian tax perspective, such property managing partnership is not considered transparent; capital gains upon such sale are taxed at the level of the partnership itself. In Art 13 of the Austria Hungary tax treaty, no specific rule regarding sales of real estate owning companies is included. Consequently, Hungary as resident state of the seller would be entitled to tax the capital gains. Considering this, Austria s taxation rights would be restricted in line with the OECD view. It should be noted, however, that the views expressed in the OECD partnership report were published long after the Austria Hungary tax treaty was concluded and are therefore not applicable in this case. g.karatas@at.pwc.com lukas.bernwieser@at.pwc.com Maintaining an equity account for tax evidence purposes for dividend distributions funded out of equity is not material for tax exemption purposes Under the Austrian Income Tax Act (Art 4 Para 12), equity granted by the shareholder can be repaid by way of dividends without triggering dividend withholding tax. To qualify for such tax exemption for repayment of equity, it has to be evidenced by the company that dividends are actually funded out of equity. The Austrian Income Tax Act requires corporations to keep an equity account for tax evidence purposes showing equity contributions, reclassifications or distributions funded out of equity. The equity account for tax evidence purposes has to be filed with the tax authorities together with the annual tax return. Recently the Austrian Independent Fiscal Senate (UFSW GZ RV/2587- W/08 dated 29 May 2012) confirmed the tax exemption of dividend distributions funded out of equity although an equity account for tax evidence purposes was not kept by the company. According to the Austrian Independent Fiscal Senate, the equity account is a formal requirement stipulated by the Austrian Income Tax Act. The equity account is not, however, material to qualify for a tax exempt repayment of equity. The account evidences the amount of equity available to fund a dividend payment out of equity, but according to the Austrian Independent Fiscal Senate, such evidence could be supplied in a different way as well. The breach of the formal requirement to keep an equity account for tax evidence purposes can therefore not lead to a taxable event of dividend distributions where it can be clearly evidenced by e.g. underlying booking entries or capital contributions released into profit that a repayment of equity for tax purposes was actually effected. maria.hopfenwieser-molzer@ at.pwc.com bettina.karpisek@at.pwc.com

5 Indirect Taxes Capital duty on grandparent contributions According to established case-law, grandparent contributions are in general not subject to the 1% capital duty. A grandparent contribution has to be assumed where an indirect shareholder grants a capital contribution to an Austrian corporation without involvement of the direct shareholder. However, if a grandparent contribution is granted in the predominant interest of the direct shareholder, capital duty will become due. In two recent decisions, the Austrian Independent Fiscal Senate (UFS) confirmed this view: Business reorganisations In this decision, the UFS considered a grandparent contribution as being subject to capital duty as the contribution was granted just three days before the sub-subsidiary company was merged up-stream into the intermediate company. The main argument for the treatment as a taxable transaction was that the intention of the grant was to create a positive market value of the subsubsidiary. Without that positive market value the merger would not have been legally permissible. Therefore the distribution was in the main interest of the intermediate company and hence was subject to capital duty. Share transfers In another decision, the UFS also considered a grandparent contribution in advance of the sale of the sub-subsidiary by the intermediate company as being subject to capital duty. Before the contribution, the sold entity was in a significant loss position, but afterwards it was sold for a profit by the intermediate company. In this case the grant was consequently considered as being in the predominant interest of the intermediate corporation and was therefore treated as taxable. Conclusion If grandparent contributions are granted in preparation of reorganisation or a sale, the capital duty impacts have to be well considered. A tight nexus in terms of time will clearly indicate a causal connection, too. georg.zehetmayer@at.pwc.com franz.sethy@at.pwc.com Government bill on land register fee Registering the legal owner of a real estate with the Austrian land register is subject to a 1.1% land register fee. The draft bill shall repair the current legislation, which was repealed by the Supreme Constitutional Court with effect of 1 January The bill will in principle increase the cost of the land register fee, but certain transactions will be subject to preferential treatment. Principle: market value Under the bill, the land register fee shall in future always be calculated on the basis of the fair market value of the real estate concerned, no matter if the ownership was obtained by virtue of purchase or transferred without any consideration. The new law will also provide for certain presumptions regarding the tax base: In purchase transactions, the purchase price shall be deemed to correspond to the market value of the real estate. Further presumptions are provided if the purchase price is not expressed as a fixed sum of money. These presumptions will apply unless the purchase price is obviously influenced by exceptional circumstances. Privileged transactions The government bill provides for a preferential tax base in certain situations: Transfers between close relatives Transfers in the course of business reorganisations Transfers between a company and its shareholders or upon bundling of all interest in a partnership in the hands of one partner. When property transfers take place under such conditions, the land register fee will be calculated on the basis of three times the standard tax value of the real estate transferred. In that case, the tax base is limited to 30% of the market value. Notably, this reduced tax base will apply even if the privileged transaction will be made at market terms. Entry into force The new rules shall apply for all applications filed with the land register after 31 December georg.zehetmayer@at.pwc.com nikolaus.kraetschmer@at.pwc.com

6 Indirect Taxes Highlights of the Salzburger Steuerdialog 2012 VAT On 28 September 2012 the Austrian Ministry of Finance published its opinion on specific tax cases in the results of the Salzburger Steuerdialog Below is an overview of the most important cases on VAT. Input VAT deduction in connection with the disposal of shares The disposal of shares is VAT exempt without input VAT deduction. Therefore, input VAT on incoming services that are directly connected with a VAT exempt disposal of shares is in general not deductible. However, according to the decision of the ECJ (C-29/08 AB SKF), input VAT related to a disposal of shares can be deductible if the input VAT is not directly connected with the disposal of shares but is in fact connected with the general business operations, e.g. finance operations of the company. According to the ECJ, the criterion for a direct connection of the incoming services with the disposal of shares is whether the costs for the incoming services are included in the sales price of the shares. According to the Austrian Ministry of Finance, input VAT on incoming services related to the disposal of shares is never deductible as the incoming services are always directly connected with the disposal of shares. This view follows the jurisdiction of the German BFH. However, according to our opinion this point of view is not in line with the jurisdiction of the ECJ, as the ECJ decided that there can be an input VAT deduction for services related to the disposal of shares. Furthermore, the view of the Austrian Ministry of Finance is only based on the jurisdiction of the German BFH, while the French Conseil d Etat decided in two cases that input VAT related to the disposal of shares was deductible if the costs of the incoming services were not included in the sales price of the share. Installation supply of goods An installation supply means that a taxable person processes goods provided by the customer using own goods which form a major part of the final product. The processing services and the goods added by the processor are then treated as one supply of goods. The question in the specific case was whether carrier ingredients, e.g. water in fruit juices, emulsions in cosmetics, etc. can be considered as major parts of the final products in order to qualify the processing as a supply of goods. According to the Austrian Ministry of Finance, carrier ingredients do not qualify as a major part. Therefore, the processing of goods where the processor adds carrier ingredients is to be qualified as a supply of service. Renting of a solar energy plant The renting of a solar energy plant that is firmly connected with a building is not to be treated as a supply of services in connection with immovable property for VAT purposes. The reason for this view in this case is that the useful life of the solar energy plant exceeds the rental period of five years. Furthermore, in this case the solar energy plant can be removed from the building without being damaged after the rental period. Therefore, this supply of service is subject to the B2B general clause. A used car can be a demonstration car for VAT purposes Under the Austrian VAT Act, input VAT for private cars is in general not deductible. However, input VAT for private cars that are used as demonstration cars by car dealers is deductible. According to the Austrian VAT guidelines, a demonstration car has to be sold within a period of six to twelve months (24 months in special cases) upon acquisition in order to qualify for input VAT deduction. The Austrian Ministry of Finance stated that a used car in general can be considered a demonstration car. However, in the case of a used car, the periods of ownership of all previous owners have to be included in this period. gerald.dipplinger@at.pwc.com roland.probsdorfer@at.pwc.com

7 Indirect Taxes Supreme Court rulings regarding the refund of energy tax Under the Austrian Public Finance Act 2011, the refund of energy tax was limited to manufacturing companies. The Austrian Supreme Courts recently decided on the constitutional validity and the entry into force of that limitation. In a recent ruling, the Constitutional Court had to decide whether the limitation of the energy tax refund to manufacturing companies was in violation of constitutional law. The complaining party stated that service and manufacturing companies competed internationally to a comparable extent. As a consequence, both would suffer a disadvantage compared to foreign companies which are not subject to Austrian energy taxes. However, the Constitutional Court followed a previous ruling and emphasised once more the different competitive conditions for these two sectors. While manufacturing companies usually produce globally traded commodities which are exchangeable by the consumer, service companies offer stationary and individual services which require extensive use of personnel and are created and consumed at the same location. Thus, the Constitutional Court takes the view that the limitation is justified and not unconstitutional. In a second ruling, the Administrative Court dealt with the entry into force of the new regulation. Pursuant to the legal wording, the application is subject to an approval by the European Commission, which was not granted until 1 February Accordingly, the Court confirmed that the new regulation is applicable starting from 1 February For periods prior to this date, including January 2011, service companies can still apply for an energy tax refund. roman.lampel@at.pwc.com michael.weghofer@at.pwc.com

8 Austrian Tax Facts and Figures Taxation of corporations Corporate income tax rate (Basis adjusted statutory accounts) 25% Non-deductible expenses (examples) Dividend withholding tax 25% Long-term accruals 20% Witholding tax on licences/royalties 20% Business meals 50% Interest witholding tax 0% Excessive car expenses for luxury cars Significant allowances Research & Development (R&D) (premium in cash) 10% Learning & Education (L&E) (Alternatively premiums in cash: 6%) up to 20% Double taxation agreements with 83 countries mainly exemption method International participation exemption for holding companies Conditions: Investments >10%, 1 year holding Dividends and Capital gains 0% Dividend EC portfolio (shares) < 10% 0% Thin capitalization rules None CFC rules None Tax loss carry forwards Losses may be carried forward for an indefinite period of time Usage of tax losses: 75% of taxable income Group taxation valid from January 2005 Consolidation of tax losses with taxable profits Conditions: Qualifying participations > 50% Group agreement and agreement on allocation of cost Losses of foreign participations may be offset against profits of group leader Annual taxable Income Tax Effective Tax Marginal Tax Rate to 11, % 0% over 11,000 to 25,000 over 25,000 to 60,000 Value added tax in line with the 6 th EU directive (EK - 11,000) x 5,110 14,000 (EK - 25,000) x 15,125 35,000 Standard rate 20% Reduced rate (Food, rent, public transportation etc.) 10% VAT refund for foreign enterprises available up to June 30 of the following year and for EU enterprises up to September 30 of the following year. Other taxes Real estate transfer tax 3.5% Capital tax 1.0% Stamp duties - Assignment agreements 0.8% - Rent agreements - Suretyship agreements % 36.50% + 5, % 43.21% over 60,000 (EK - 60,000) x 50% + 20,235 > 33.73% 50% Social security on monthly earnings up to Employer s share up to 21.83% Payroll related taxes approx. 8.0% Employee s share up to 18.07% Income cap for social security contributions, social security totalisation agreements with various states 1.0% 1.0% Contacts PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft Erdbergstraße 200, 1030 Vienna Austria Tel Tax Partners and Directors: Monika Berndl ext Ernst Biebl ext Doris Bramo-Hackel ext Alexandra Dolezel ext Marianna Dozsa ext Peter Draxler ext Margit Frank ext Herbert Greinecker ext Peter Hadl ext Bernd Hofmann ext Martin Jann ext Aline Kapp ext Matthias Kornberger ext Rudolf Krickl ext Kurt Lassacher ext Erik Malle ext Peter Perktold ext Friedrich Rödler ext Maria Schachner ext Thomas Steinbauer ext Thomas Strobach ext Christine Weinzierl ext Rupert Wiesinger ext Christof Wörndl ext Georg Zehetmayer ext ) ext. 2) ext. 3) ext. We encourage feedback on the newsletter and the content. Equally, we welcome any of your thoughts on topics that you would like to see addressed in future issues. Visit our website for archived Austrian Tax News: Copyright and Publisher: PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft, Erdbergstraße 200, 1030 Vienna, Austria Editor: Christof Wörndl, christof.woerndl@at.pwc.com The above information is intended to provide general guidance only. It should not be used as a substitute for professional advice or as the basis for decisions or actions without prior consultation with your advisors. While every care has been taken in the preparation of the publication, no liability is accepted for any statement, option, error or omission. PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.