Transfer pricing
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Austria
International business-related issues
Controlled Foreign Companies (CFC) and thin capitalization
Beginning in January 2019, the Austrian government introduced a Controlled Foreign Company Rule. According to this rule, passive income of foreign subsidiaries in low-taxed countries (equal or below 12.5 percent) will be added to the income of the Austrian shareholder, if certain conditions are fulfilled. The CFC rule applies to foreign entities which are controlled by a domestic entity that holds more than 50 percent of the voting rights alone or together with its affiliated companies. These rules only apply to non-distributed profits of the CFC arising especially from the following categories of passive income: interest or any other income generated by financial assets, royalties or any other income generated from intellectual property, dividends, financial leasing, income from insurance and banking, etc. An exemption is available if a CFC carries out substantial economic activity through engagement of staff, equipment, property and buildings, as evidenced by relevant facts and circumstances. If only 1/3 or less of the total income of the foreign entity falls within the categories of passive income as listed above, the foreign entity will not be considered a CFC. In general, tax rules as the substance-over-form-principle, beneficial ownership concept and other anti-abuse rules remain.
Austrian tax law does not provide for specific thin capitalization rules. However, the Austrian courts have developed various principles to determine under which circumstances debt financing from shareholders is to be treated as equity for tax purposes. With regards to an interest deduction, intragroup interest payments by Austrian companies to foreign connected low or non-taxed entities are not recognized for tax purposes.
Double taxation treaties
Austria has signed 100 double taxation treaties with other countries to avoid double taxation of income or gains arising in one territory and paid to residents of another territory. These treaties either grant a credit against Austrian tax for foreign taxes paid on the same income (eg, with the US, UK, Japan and Italy) or exempt foreign-source income.
If there is no applicable tax treaty, the Austrian Ministry of Finance may grant unilateral relief in order to avoid double taxation.
Transfer Pricing
Transfer pricing documentation based on the OECD Transfer Pricing Guidelines (master file, local file, country-by-country report) must be prepared and submitted with the Austrian tax authorities according to the Austrian Transfer Pricing Documentation Law. The size of required documentation depends on the turnover of a corporate entity.
All business transactions between related parties, one of which is a resident while the other is a non-resident, must be effected at arm’s length, or at fair market value. Following from this principle, should a company through a transfer pricing transaction pay more for a service to a non-resident related party than what would be considered at arm’s length in accordance with the Austrian corporate tax law, then the excess amount of the transaction would not be a deductible expense for the resident company for profit tax purposes. In Austria, 5 methods that can be used for establishing whether the business transactions between related parties are agreed at market prices, which are in line with the OECD Transfer Pricing Guidelines (comparable uncontrolled price method, resale price method, cost plus, profit split method, and transactional net margin method).
Business transactions between related parties and prices agreed between them will be recognized for tax purposes and accepted by the tax authorities if the taxpayer has in its possession, and provides upon a request from the tax authorities, details on the method used for determining the transfer prices.