Austrian Tax News. UFS: Merger of a group parent into a non-group company does not terminate the tax group. Season s Greetings and a Happy New Year!

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1 Austrian Tax News Season s Greetings and a Happy New Year! In this issue Direct Taxes UFS: Merger of a group parent into a non-group company does not terminate the tax group by Franz Rittsteuer and Philip Andert The concept of the economic employer in the case of personnel secondment by Christof Wörndl and Laura Herold Indirect participation in German limited liability company by Guelay Karatas and Lukas Plakolm Austrian Independent Fiscal Senate: Availability of losses in spite of significant change of business parameters by Alexander Wagner, Christian Poechlinger and Sebastian Heger International participation exemption for a domestic partnership with Liechtenstein shareholders by Guelay Karatas and Anna-Sophie Brueser Indirect Taxes Salzburg Tax Dialogue 2013 Highlights on VAT by Juliane Laubner and Helene Breit VAT grouping in light of BFH jurisdiction by Roland Probsdorfer and Christoph Wagner Energy taxes in Austria: Ministry of Finance releases Energy Tax Guidelines 2013 by Alexander Wagner and Markus Ruiner Austrian Tax Facts and Figures UFS: Merger of a group parent into a non-group company does not terminate the tax group On 25 April 2013 the Austrian Independent Fiscal Senate ( UFS ) ruled that a merger of a group parent of an Austrian tax group into a company not belonging to the tax group does not terminate the tax group. This decision is not in line with the current opinion of the Austrian tax authority. View of the tax authority Since the implementation of group taxation in 2005, the Austrian tax authority has argued that the merger of a group parent into a company not belonging to the tax group constitutes the end of this tax group. The tax group is terminated since the tax group parent withdraws from the tax group. The group parent attribute is a personal right of the group parent which cannot be transferred via the universal legal succession effective due to the merger. The absorbing non-group company can found a new tax group from the next financial year onwards. However, the consequences of the termination of the tax group have to be considered. One such consequence

2 Direct Taxes is especially the reverse transaction of the tax group effects if a group member does not accomplish the minimum commitment period of three years. View of commentaries This restrictive opinion of the tax authority was rejected in the Austrian tax commentaries. A merger is carried out under universal legal succession effective for Austrian company law and Austrian tax law. Therefore, the group parent attribute of the merging company is transferred to the absorbing non-group company. The group parent attribute does not constitute a personal right. The opinion of the tax authority would be a restriction for tax groups in terms of growing upwards. This petrification of the tax group would conflict with the legislator s goals of a modern and flexible group taxation. UFS decision of 25 April 2013 The UFS confirmed the above mentioned arguments of the Austrian tax commentaries in its decision. It ruled that a merger of a group parent into a non-group company neither terminates the tax group nor does it lead to a reverse transaction of the tax group effects, even if the tax group existed for fewer than three years. The tax authority has appealed against this decision. Final clarification on this issue is therefore still on hold. Recommendation If mergers as described above were carried out in the past and if the Austrian tax authority assessed the termination of the tax group, we recommend appealing against this assessment. franz.rittsteuer@at.pwc.com phillip.andert@at.pwc.com The concept of the economic employer in the case of personnel secondment In a recent decision, the Administrative Court has contradicted the Austrian tax authority regarding the question of the economic employer. In this specific case an employee was sent to a Slovak subsidiary to perform various management related activities. The period of residence in Slovakia was less than 183 days. The pro rata personnel costs for the activities in Slovakia, such as wages, were economically borne by the Slovak subsidiary. The view of the tax authority With regard to international secondments the Austrian tax authority principally follows Article 15 (2) OECD Model Tax Convention. This article shifts the taxation right to the State of residence if all three of the following conditions are satisfied: a) The presence in the other State is less than 183 days. b) The employer paying the remuneration must not be a resident of the State in which the employment is exercised. c) If the employer has a permanent establishment in the State in which the employment is exercised, the exemption is given on condition that the remuneration is not borne by that permanent establishment. Based on case law for domestic personnel leasing in general, the lessor is seen as the employer for the secondee in the international context as well. The lessee becomes the employer if the foreign company assumes the typical duties of an employer like negotiations of salaries, pension claims and vacation entitlements, decisions on disciplinary sanctions, responsibility for the employee s social insurance contributions, etc. In the absence of such additional employer functions, Austrian tax authorities treat the legal employer as the employer on the basis of Article 15 (2) OECD Model Tax Convention. In the case at hand this was the Austrian entity. Therefore tax inspectors denied the exemption of the Slovakia based salaries from Austrian income tax under the tax treaty as the manager was in Slovakia for less than 183 days. The decision of the Austrian Administrative Court The Administrative Court held that domestic case law was not relevant in this case. Regarding the assessment of the employer, the Administrative Court follows the concept of the economic employer as stipulated in Article 15. The fact that the Slovak subsidiary had borne the pro rata salaries for the activities exercised in Slovakia is sufficient for the Slovak entity to be understood as the employer for the purpose of Article 15 (2) (b). As a consequence, the Admi- 2

3 Direct Taxes nistrative Court allocated the right of taxation to Slovakia. The Administrative Court does not demand any additional requirements like further duties of an employer. Summary In taking this decision, the Administrative Court followed the concept of the economic employer which is already used in many countries and which contradicts the view of the Austrian tax authority. This decision suggests that the right of taxation is to be allocated to the State where the employment is exercised provided that the company in the work state economically bears the salaries for the employee. Income tax issues for persons seconded to Austria should be monitored more carefully in future as a consequence of this ruling. christof.woerndl@at.pwc.com laura.herold@at.pwc.com Indirect participation in German limited liability company In a recently issued letter ruling the Austrian Ministry of Finance dealt with foreign withholding tax credits for dividend income from a German subsidiary. The letter ruling was in response to a case involving an Austrian individual holding shares in an Austrian company with an 80% shareholding in a German company. Dividend distributions of the German subsidiary to its Austrian parent company are subject to German withholding tax, which is principally reduced to nil under the EU Parent Subsidiary Directive. Dividend payments from the Austrian company to the Austrian individual shareholder are subject to 25% withholding tax. In case the German tax authorities should look through the intermediate Austrian holding company and attribute the dividend to the Austrian indirect shareholder, a withholding tax reduction to 15% would only be granted under the Austria-Germany tax treaty. As the subsequent distribution by the Austrian company to the individual shareholder would be subject to 25% withholding tax, double taxation would be incurred if no credit could be claimed for the underlying German withholding tax in Austria. The OECD Partnership Report states that the state of residence has to mitigate double taxation based on Article 23 of the tax treaty in case there is an attribution conflict resulting from deviating domestic law. Austria therefore has to provide the facility for a credit of German withholding tax provided that the individual shareholder can evidence to which extent the dividend distribution of the Austrian company covers the German dividend being subject to 15% German withholding tax. g.karatas@at.pwc.com lukas.plakolm@at.pwc.com

4 Direct Taxes Austrian Independent Fiscal Senate: Availability of losses in spite of significant change of business parameters In its decision of 24 June 2013 (RV/1067-L/06), the Austrian Independent Fiscal Senate ( UFS ) held that losses can be transferred in the course of a merger even if the company s business parameters have changed by up to 90%. This decision is in contrast to the legal opinion of the Austrian Ministry of Finance. Fiscal administration According to the Austrian Reorganisation Tax Act (ARTA), in the course of a merger, any losses of a company can only be transferred to the receiving company if the company s loss causing assets are comparable at the time of the merger date and the time when losses were generated. The view taken by the Austrian Ministry of Finance is that this comparability is no longer given if certain business criteria (e.g. sales, fixed assets, order volume) change by more than 75% in total. A similar rule regarding loss trafficking can be found in the Austrian Corporate Income Tax Act (ACTA). The main aim of both rules mentioned above is to avoid the transfer of losses if the identity of the taxpayer is no longer given. Other than ARTA, ACTA requires not only one significant change in business parameters but also the fulfilment of three conditions: (i) change in the organisational structure, (ii) change in the economic structure, and (iii) change in the shareholder structure. If all three criteria are met collectively, losses will not be transferred. Commentaries The ACTA rule dealing with the change of the economic structure requires the same 75% change criterion for business assets. However, unlike the ARTA rule it additionally demands two more criteria, namely a change in the organisational structure and shareholder structure to become effective. This disproportion between both rules was subject to some legal discourse in tax commentaries. It was criticised that if the ACTA rule demands three criteria including a 75% change of business assets to become effective, then it is not justified to use the same benchmark in the ARTA rule since there is only one criterion. Consequently the benchmark should be much higher, otherwise it would be unsystematic. UFS decision In its above mentioned decision, the UFS held in accordance with the commentary based opinion, It stated that a significant change in business parameters requires a change of more than 90%. Remarks It is not likely that the Austrian Ministry of Finance will change its position due to the UFS decision. Furthermore, the tax authority did not appeal against the decision of the UFS. Finally it should be noted that in another decision the UFS held in line with the tax authority s view and the 75% criterion. alexander.wagner@at.pwc.com christian.poechlinger@at.pwc.com sebastian.heger@at.pwc.com

5 Direct Taxes International participation exemption for a domestic partnership with Liechtenstein shareholders The Austrian Ministry of Finance has issued a letter ruling regarding the application of the international participation exemption at the level of an Austrian partnership with one German and two Liechtenstein corporate shareholders. According to the non-discrimination clause of Article 24 OECD Model Convention, the taxation of a permanent establishment of a foreign company may not be more disadvantageous than in the case of a domestic company. As the international participation exemption is available for foreign dividend income and capital gains of an Austrian company obtained via a domestic permanent establishment, the participation exemption is also to apply in the case of companies with domestic permanent establishments if a tax treaty with Austria is in place. The Austrian Ministry of Finance has stated that the non-discrimination clause is only applicable if reciprocally exercised in the other country. Reciprocity was approved between Austria and Liechtenstein regarding the participation exemption for domestic dividends obtained via an Austrian partnership. It further maintained that this is also to be effective for the international participation exemption. g.karatas@at.pwc.com anna-sophie.brueser@at.pwc.com Salzburg Tax Dialogue 2013 Highlights on VAT Indirect Taxes On 7 October 2013 the Austrian Ministry of Finance published the VAT results of the Salzburg Tax Dialogue Outlined below are some of the issues it discussed: Services of a software developer If upon purchase of electronic services a user gets directed from one website to another without explicit reference, the question arises as to who provides the electronically supplied services from a VAT point of view. Generally, this is the operator of the first website. The operator of a website acts as a disclosed agent for VAT purposes only if it is clear for the customer that the operator acts in the name and for the account of a third party. The external appearance and thus the perception by the user or customer is decisive in determining the service provider. Benefit in kind from cross-border use of company cars If an Austrian resident/individual is employed by a German employer and has a company car which can also be used for private purposes, the question arises as to the place of supply of this service. Under Austrian VAT law the place of supply for such services in general is the employee's place of residence or usual abode. The latter results from personal ties and relationships between the employee and his place of residence. If appropriate, the German employer has to register with the Graz-Stadt tax office and pay VAT. VAT liability because of invoicing The point discussed was whether small size businesses are liable for VAT charged on an invoice, although no valid VAT invoice is issued as small-sized businesses traditionally do not have a VAT identification number. A VAT identification number has to be shown on invoices for the supply of goods or services for which the customer is entitled to deduct input VAT. The lack of a VAT identification number is not harmful in the case of small-sized businesses, as no services are provided that allow for input VAT deduction. However, smallsized businesses showing VAT are liable for VAT because of invoicing. If the invoice is corrected, the VAT liability will be cancelled. VAT identification number of letterbox entities At the seat of one particular entity no business activity was carried out, making it a mere letterbox entity. It had to be reviewed whether the VAT identification number needed to be cancelled. In case the factual or legal circumstances change or are wrongly assumed to exist, the VAT identification number must be cancelled. j.laubner@at.pwc.com helene.breit@at.pwc.com

6 Indirect Taxes VAT grouping in light of BFH jurisdiction VAT grouping in Austria In recent years, the German Fiscal High Court (BFH) and the European Court of Justice (ECJ) have issued remarkable decisions regarding VAT grouping. As developments in Germany can have an impact in Austria, this article provides an overview. General conditions in Austria To establish a VAT group in Austria, the controlled company must be financially, organisationally and economically integrated in the controlling company. It is necessary that all three characteristics are fulfilled. It is sufficient if one characteristic is weak provided that the other two are strong. A VAT group comes into existence as soon as the conditions are met. An application is not necessary. Financial integration Financial integration requires a participation of 75% or more. A participation of 50% or more is regarded as sufficient if the other conditions are strong. The BFH rejected financial integration between sister companies if both sister companies are not integrated in the same shareholder qualifying as the controlling company. Therefore, in order to be members of a VAT group, sister companies must each be integrated within the joint controlling company. They both must meet all relevant integration criteria vis-à-vis the joint controlling company. The Austrian fiscal authorities followed this view in the Austrian VAT guidelines. Organisational integration Organisational integration means that the controlling company can enforce its will against the controlled company based on organisational measures. Usually, the managing directors of both the controlling and the controlled company must be the same persons. Given the above, in 2011 the BFH denied an organisational integration based only on certain other measures (managing directors are not identical). The German Ministry of Finance reacted by publishing a newsletter, stating that in exceptional cases the organisational integration can be achieved without the managing directors being identical based only on other measures. In such cases, the controlling company must be able to make direct interventions in the ongoing management of the controlled company. These interventions must be safeguarded by binding written agreements. The Austrian VAT Guidelines have neither directly implemented the decision of the BFH nor the recommendations of the German newsletter. However, according to the Austrian VAT Guidelines, organisational integration should still be possible, even if the managing directors are not the same persons. It must be ensured that the controlling company can enforce its will against the controlled company by other measures, e.g. by setting up binding and written group policies. The required content of such group policies and the level of influence of the controlling company over the controlled company is currently not completely clear. Economic integration Economic integration requires a sufficient link between the controlling and the controlled company from an economic point of view, i.e. a reasonable economic interaction/interdependence. The business activities of both companies have to be coordinated and need to complement one another. European Court of Justice Recently, the ECJ held that the conditions for VAT grouping in the EU VAT Directive are final and binding for the Member States, and that the Member States cannot request additional conditions. This may impact the rather strict interpretation in Austria and may make the establishment of a VAT group more flexible in the future. roland.probsdorfer@at.pwc.com christoph.wagner@at.pwc.com

7 Indirect Taxes Energy taxes in Austria: Ministry of Finance releases Energy Tax Guidelines 2013 On 29 August 2013, the first decree ( Wartungserlass 2013 ) related to the Energy Tax Guidelines 2011 ( Energieabgaben-Richtlinien 2011 ) was enacted by the Austrian Ministry of Finance in order to enter legal amendments, implement the latest judgments of the Supreme Court and provide further clarifications. Clarification of manufacturing firms which may apply for a refund of energy tax According to the Ancillary Budget Act 2011 ( Budgetbegleitgesetz 2011 ), only firms whose focus is verifiably on the production of tangible assets at least 50% of their total revenue had to be generated from the production of tangible assets qualified as manufacturing firms thus making them eligible to apply for energy tax refunds. However, this definition led to numerous demarcation problems because it then meant that the energy consumed had to be allocated to the production and services respectively. Besides that, this separation led to a blurring between a manufacturing firm s refundable energy taxes and a service company s non-refundable energy taxes. Therefore, the decree now clarifies that companies have to predominantly produce tangible assets in order to be seen as a manufacturing firm. This is the case if more than 80% of their revenue comes from the production of tangible assets. Entitlement for refund of energy taxes of separable parts of a business The Austrian Ministry of Finance also commented on companies which cannot be classified as a pure manufacturing or pure service company as they are providing both a production site as well as services such as for example trading. If the part of a business can be separated, it may also qualify for an energy tax refund from now on provided that it generates more than 50% of the whole business s total revenue, 80% of the part s turnover results from the production and provided that respective records are made. Further adjustments With respect to VAT groups, the parent company has to apply for the respective energy tax refunds with the appropriate VAT group tax authority for every single group member, whereas under the other energy tax laws (such as electricity, natural gas and coal), the group parent only has to file one single application form for all group companies. The decree also specifies which energy taxes are refundable. This means that it is now required that energy has been consumed and the respective taxes have been paid in order for the latter to be refundable. alexander.wagner@at.pwc.com markus.ruiner@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 86 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 Rate Marginal Tax Rate to 11, % 0% over 11,000 to 25,000 over 25,000 to 60,000 (EK - 11,000) x 5,110 14,000 (EK - 25,000) x 15,125 35, % 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 4,440 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 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 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 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. Value added tax in line with the 6 th EU directive 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 1.0% 1.0% 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 refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.