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As part of the EU Commission’s Anti-Tax Avoidance Package, the Anti-Tax Avoidance Directive establishes new rules against tax avoidance practices in Europe.
On 12 July 2016, the Council of the European Union agreed on a directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (2016/1164/EU) – the Anti-Tax Avoidance Directive (“ATAD”). The ATAD is a result of the OECD’s BEPS (Base Erosion and Profit Shifting) project and the CCCTB (Com-mon Consolidated Corporate Tax Base) proposal. It addresses situations where corporate groups – mostly multinational corporations – use disparities between national tax systems in order to reduce their overall tax liability.
The ATAD applies to all taxpayers that are subject to corporate tax in at least one Member State, including permanent establishments (“PE”) in at least one Member State of companies resident for tax purposes in a third country. In order to prevent tax avoidance, the ATAD consists of the following five measures:
According to the ATAD, borrowing costs shall basically be deductible only up to 30 % of the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) in the tax period in which they are incurred. By derogation from this general rule, the taxpayer may be given the right to deduct exceeding borrowing costs up to EUR 3 million or to fully deduct exceeding borrowing costs if the taxpayer is a standalone entity. In addition, there are special “intra group rules” which allow the taxpayer to deduct a higher amount of borrowing costs. Member States may also provide for rules which allow the taxpayer to carry forward exceeding borrowing costs that cannot be deducted in the respective tax period.
Currently, Austrian tax law prohibits the deduction of interest payments to affiliated companies in low-tax countries (taxation under 10 % corporate tax) and deduction of foreign intragroup acquisitions of investments.
International reorganisations often lead to the loss of Austria’s right of taxation in favour of other countries. Under Article 5 of the ATAD, there should generally be a realisation of hidden reserves if (i) assets are transferred between a head office and its PE, or between PEs out of Austria or (ii) if the tax residence is transferred out of Austria (except to the extent a PE remains in Austria) or (iii) the PE is transferred out of Austria. The tax there-fore could be deferred and paid in instalments over five years if the transfer is within the EU (or the EEA to the extent the country has signed up to mutual assistance on recovery claims).
In Austria, a new exit taxation system was introduced on 1 January 2016. The option for a tax deferral was replaced by the option to apply for the payment of instalments if business assets are transferred from Austria to an EU or EEA member state with comprehensive administrative and enforcement proceedings. With regard to assets that are part of the business’ fixed assets, the instalment period amounts to seven years, while it is two years for current assets.
The ATAD proposes a General Anti-Abuse Rule to set a common minimum standard across all Member States. By applying this rule, the tax authorities can disregard a company’s legal arrangements if they are entered into for the sole purpose of creating tax advantages without having any non-fiscal reasons. The existing Austrian tax provision of Section 22 of the Austrian Federal Fiscal Code already corresponds to this General Anti-Abuse Rule.
Under certain circumstances, the non-distributed income (eg interest payments, allocation of profits, royalty payments or leasing income) of a controlled foreign subsidiary is included in the corporate tax base of the parent company by applying the CFC rule. The CFC rule applies if a subsidiary (i) is directly or indirectly controlled (50 % of voting rights or capital or rights to profit) and (ii) is situated in a low-tax country (meaning that the corporate tax paid by the subsidiary is lower than the difference between the fictitious Austrian corporate tax on the income and the effective corporate tax in the country where the subsidiary is resident). Concerning Austrian tax law, the CFC rule is therefore applicable if the corporate tax rate of the country where the subsidiary is resident is lower than 12.5 %. At present, Austrian law does not know any comparable CFC rule. However, under certain requirements, the repatriation of profits (eg in the form of dividends) is not exempt from Austrian corporate tax.
Multinational corporations sometimes exploit the fact that Member States possibly treat the same income or entities differently for tax purposes (hybrid mismatch). The aim of this provision is to eliminate the double non-taxation created by the use of certain hybrid instruments. In cases of a double deduction, the deduction shall be given only in the Member State where such payment has its source. In cases of a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.
The provisions under the ATAD shall generally be applicable as of 1 January 2019. The exit taxation rule shall be transposed by 1 January 2020. Additionally, the implementation of the interest limitation rule has to be transposed only by 1 January 2024 if (i) the OECD does not previously reach an agreement on a minimum standard and (ii) the EU Commission confirms that Austria has targeted a rule that is equally effective to the rule on interest limitation.
The Anti-Tax Avoidance Directive will lead to substantial changes in Austrian law concerning the taxation of corporate groups. Especially in order to deal with the interest limitation rule and the CFC-rule, companies will have an increased planning effort and higher costs. Companies therefore must deal with the Anti-Tax Avoidance Directive pro-visions at an early stage and carefully examine the effects on their business structure.
authors: Marco Thorbauer, Christopher Jünger