2018 Annual Tax Reform entails significant changes for corporations

Transcription

1 changes for corporations The draft for the upcoming 2018 annual tax reform has finally been published. This draft proposes a number of tax changes which are of significant relevance in particular for internationally active corporations. One of the immanent aims of the draft bill is stemming cross-border tax avoidance schemes accompanied by the implementation of the standards set by the EC Anti Tax Avoidance Directive. In addition, the draft tax bill provides for facilitation as well as improvements from a procedural tax perspective. The following is a brief summary of the proposed main changes relevant to corporations. 1. Introducing CFC rules 1.1 Functionality The most significant change proposed by the draft 2018 annual tax reform is the introduction of CFC rules for controlled foreign companies in Austrian corporate income tax law. Currently, dividends distributed by mainly passive income earning low taxed non-austrian subsidiaries are part of the taxable income of the Austrian parent company and thus subject to Austrian corporate income tax with a tax credit for any foreign taxes actually paid. Pursuant to the draft bill this switch-over mechanism shall be replaced by a CFC system with the income of a foreign passive income earning low taxed subsidiary being added to the tax base of the Austrian parent, irrespective of any actual distributions. As a result, the foreign subsidiary loses its shielding effect from a tax perspective. By adding the foreign subsidiary s income to the Austrian parent s tax basis, the Austrian corporate income tax burden will be increased. Any future dividends distributed by the foreign subsidiary should be tax-free to the extent that these profits have already been subject to Austrian corporate income tax in previous years in the course of applying the CFC rules. 1.2 Controlling position The CFC rules will contrary to current legislation be triggered in case the Austrian corporation is in a controlling position with respect to the foreign subsidiary thereby encompassing numerous group scenarios. A controlling position is generally assumed if the controlling entity directly or indirectly together with its related entities holds more than 50% of the voting rights or of the capital of the foreign entity or if it has the right to receive more than 50% of the foreign entity s profits. By way of considering also related entities (which are generally assumed as such in case of a participation of at least 25% of the voting rights or of the capital or a participation of at least 25% in the entity s profit) the scope of the CFC legalisation is considerably enlarged, thereby encompassing inter alia also the profits achieved by foreign sister entities.

2 1.3 Prerequisites The CFC rules will be triggered in case of a low taxed passive income foreign subsidiary with no sufficient substance (in the sense of lacking significant economic activities). Presenting evidence of the foreign entity s substance will avoid the application of the CFC rules irrespective of the entity achieving low taxed passive income. A passive income earning entity is assumed if the scope of detrimental passive activities sustainably exceeds one third of the entire income of the foreign entity. It has to be highlighted that compared to the current legislation the scope of passive activities will significantly be enlarged according to the draft tax bill. Dividends and capital gains as well as the activities of insurance companies and banks will also be included. The latter in particular targets foreign insurance and banks subsidiaries, such as group financial vehicles. These entities will only be exempt from the CFC rules provided the scope of mere group-internal insurance or bank activities is less than one third of the entire passive income of the foreign entity. The other criterion, i.e. the low taxation, is triggered if the effective tax rate in the foreign entity s residence state does not exceed 12.5%, calculated from a tax basis as determined upon applying Austrian tax rules. 1.4 Avoidance of double taxation A potential double taxation triggered by the CFC rules shall be avoided by providing for a tax credit for actually paid foreign taxes. Additionally, the (otherwise taxable) capital gain will be reduced by the amount of profits (forming part of such capital gain) which have already been subject to the Austrian tax by virtue of the CFC legislation. 1.5 Relevance for foreign PEs The CFC rules will also be relevant for passive income earning low taxed foreign PEs of an Austrian corporation. The CFC rules will apply irrespective of whether the underlying tax treaty provides for the exemption method for the profits of the PE which effectively constitutes a treaty override (i.e. suspending the tax treaty provision by implementing a more domestic rule). 1.6 Relevance for non-austrian corporations Foreign corporations with neither their seat nor their place of management in Austria will only be targeted by the CFC rules to the extent that they hold participations in foreign entities (earning low taxed passive income) which are attributable to an Austrian PE. Contrary to the currently prevailing rules, the CFC rules as well as the tax exemption for eligible participations will apply irrespective of whether the foreign corporation is resident within the EU, the EEA or a third country. 1.7 Relevance for private foundations Also, an Austrian private foundation holding shares in a foreign entity earning low taxed passive income will be encompassed by the new CFC rules.

3 1.8 Amendment of the switch over mechanism As a result of the introduction of the CFC rules, the switch over mechanism for portfolio participations which only targets low-taxed foreign subsidiaries will be completely renounced. By contrast, the scope of the switch over mechanism rule for eligible international participations will be extended to portfolio participations of at least 5%. Such switch over mechanism will be triggered if (i) the foreign subsidiary predominantly achieves low taxed passive income (with dividends remaining to be treated as non-harmful active income) and if (ii) the CFC legislation is not applicable. If these criteria are met, dividends will not be tax-exempt on the level of the Austrian parent but will rather be subject to Austrian corporate income tax with a tax credit for any foreign taxes actually paid. In case of qualified international participations capital gains and losses or any other changes in value of these participations will be exempt from tax neutrality. 1.9 Non-deductibility of interest expenses from a group internal acquisition of shares as well as tax neutrality of depreciations of participations The draft tax bill of the 2018 annual tax reform clarifies that the non-deductibility of interest expenses on debt capital raised for the acquisition of shares from a group company applies irrespective of whether the income from the participation acquired leads to tax-exempt or taxable income. This equally applies to the non-deductibility or allocation of deprecation expenses on participations. Only the non-deductibility of depreciations having their reasoning in previous distributions is restricted to participations leading to tax-exempt dividend income Actions to be taken The new CFC rules shall come into legal force as of fiscal years starting after 30 September In case of fiscal years corresponding to the calendar year, these rules will have to be taken into consideration as of Internationally active corporations with foreign group companies or PEs earning passive income are therefore strongly advised to scrutinize existing structures and consider appropriate reorganizations in case the CFC rules may become relevant. 2. Restrictions in case of exit tax scenarios Currently it is possible to apply for deferred payment of any exit tax triggered in case of an exit scenario with a period of seven years being applicable for fixed assets. The draft 2018 annual tax reform proposes to shorten this period to five years. Additionally, the draft bill extends the list of scenarios leading to an immediate due date for any outstanding instalments by (i) the transfer of the corporation s seat or place of management outside the EU or EEA, (ii) the insolvency of the taxpayer or its liquidation as well as

4 (iii) the taxpayer s default with instalments by at least 3 months. The shorting of the instalment period as well as the extension of the above described scenarios will entirely enter into force for any exit tax scenarios being realized as of 1 January 2019 onwards. These changes also apply to any exit tax scenarios realized in the course of reorganizations with a reorganization date after 31 December Facilitation re refund of Austrian withholding taxes The procedure necessary for a refund of Austrian withholding taxes (capital withholding tax, wage withholding tax or withholding tax on specific cross-border scenarios) will be facilitated for non-austrian resident taxpayers. As a first step, an electronic pre-registration has to be submitted. The application for the refund will subsequently have to be signed and submitted with a delivery confirmation as well as a certificate of residency of the foreign tax office. 4. Broadening of advance tax rulings The proposed broadening of the application of advance tax rulings (i.e. the pre-clarification of tax treatment of certain issues) is highly appreciated. In addition to questions re reorganizations, tax groups as well as transfer pricing which can already now be clarified by way of advance tax ruling, aspects of international tax law, VAT law as well as a potential application of the abuse of law doctrine will be admitted to advance tax ruling as of 2019 (respectively 2020 for VAT related queries). Simultaneously the law provides for a period of two months in the course of which these queries shall be answered by the tax authority (this can be extended in case of a rather complex fact pattern). 5. Accompanying monitoring instead of tax audits As a positive remark, the 2018 annual tax reform proposes the introduction of an accompanying monitoring process of the taxpayer as an alternative to a typical tax audit. Such possibility shall be available to taxpayers exceeding specific turnover thresholds. The aim of such process is to provide adequate planning as well as legal certainty to the taxpayer, as in case of an accompanying monitoring process a tax audit may only be possible in particular circumstances. A prerequisite for participation in an accompanying monitoring process is the introduction of an internal tax control system which has been scrutinized by an Austrian tax adviser and which ensures the application of Austrian tax rules. The accompanying monitoring process can be initiated for the entire group of companies by way of application, leading to an increased disclosure obligation by the taxpayer as well as to an increased duty to provide information by the tax authority.

5 6. Indirect share transfer does not trigger Austrian real estate transfer tax The draft bill clarifies that a mere indirect transfer of shares in a real estate owning entity will not trigger Austrian real estate transfer tax. Contact: Michaela Petritz-Klar Head of Tax CEE Partner, Taylor Wessing Vienna +43 (0) m.petritz-klar@taylorwessing.com Taylor Wessing 2018 This article has been prepared as a general information only. Neither is it intended to provide legal advice, nor can it replace legal advice. Taylor Wessing assumes no liability of any kind. TaylorWessing e n w c Natlacen Walderdorff Cancola Rechtsanwälte GmbH A-1030 Vienna, Schwarzenbergplatz 7 Tel: Fax: