Income Tax Treatment of Corporate Finance in Austria

• Author: Eva Eberhartinger - Matthias Petutschnig
• Position: LLM is full professor and head of the Tax Management Group of the Department of Finance, Accounting and Statistics of WU - Vienna University of Economics and Business - Research and teaching associate at Tax Management Group of the Department of Finance, Accounting and Statistics of WU - Vienna University of Economics and Business.
• Pages: 1-25

European Tax Studies 1/2010

© Copyright Seast – All rights reserved

1

Income Tax Treatment of Corporate Finance in Austria

Eva Eberhartinger and Matthias Petutschnig1

1. Introduction

The current legal basis of income tax on individuals, including partners from

partnerships, in Austria is the Einkommensteuergesetz (EStG) (individual

income tax act) enacted in 1988. Income tax of corporations is based on

the Körperschaftsteuergesetz (KStG) (corporate income tax act) enacted

also in 1988. The EStG is primarily applicable to individuals but as the KStG

often refers to the regulations of the EStG the individual income tax act is

also highly relevant for corporate taxpayers. Corporations that either have

their seat or their place of management in Austria are subject to unlimited

corporate income taxation and are taxed on their worldwide income. The

statutory tax rate for corporations is 25%.2 Austria applies a shareholder-

relief-system on dividends distributed to individual shareholders with a 25%

capital yield tax withheld by the distributing corporation.3 Dividends

distributed to corporate shareholders are exempt from tax at the parent´s

level.4 However in certain situations5 (shareholding of less than 25% or

indirect shareholding for a domestic parent; shareholding of less than 10%

for a foreign parent) the distributing corporation is obliged to withhold 25%

capital yield tax that will then be credited to the shareholder‟s overall

corporate income tax liability or will be refunded.6

1 Prof. Dr Eva Eberhartinger, LLM is full professor and head of the Tax Management Group of

the Department of Finance, Accounting and Statistics of WU - Vienna University of Economics

and Business and Vice-Rector for Finance of WU.

Matthias Petutschnig is research and teaching associate at Tax Management Group of the

Department of Finance, Accounting and Statistics of WU - Vienna University of Economics

and Business.

2 § 22(1) KStG.

3 § 93 et seq EStG.

4 § 10 KStG.

5 § 94 EStG and § 94a EStG.

6 § 94 and 94a EStG.

European Tax Studies 1/2010

© Copyright Seast – All rights reserved

2

In case of debt finance, Austria applies rather liberal rules on the tax

deductibility of interest payments. Generally, an Austrian corporation is

even for tax purposes free to decide how to finance its corporate business

(freedom of finance).7 Interest payments therefore are in general deductible

irrespective of whether they are fixed rate, floating rate or profit

participating. Neither the Austrian tax code nor case law of the Austrian

Supreme Administrative Court provides for an explicit definition of

deductible interest payments for corporations.

The article examines in further detail the tax treatment of equity and debt

finance of corporations8 in a domestic and in a cross-border setting, and

relates it to the ideal of tax neutrality. It is structured as follows: In section

2, the typical tax burden on equity and on debt finance is described, in a

domestic scenario as well as in a cross-border setting. Section 3 covers

specific topics such as shareholder loans, thin capitalization, hybrid finance,

and other rules denying interest deductibility. Sections 4 and 5 then analyze

the compliance of the Austrian tax regime on corporate finance with two

distinct benchmarks: the concept of tax neutrality on the one hand, and

principles of EC law on the other hand. Section 6 concludes.

2. Taxation of Equity and Debt in Austria

2.1 Domestic

2.1.1. Financee

According to the general tax principles operating expenditures are tax

deductible if they are business related i.e. caused by business activities.9

Pursuant to tax practice, expenses are caused by the business if there is an

objective connection with an operative business, if the expenditures are

subjectively destined to the business and if they are not subject to a

restriction on tax deductions.10 Therefore interest payments are generally

tax deductible if the underlying loan serves a business.11 Austrian tax law

7 Schuchter, Branch Report – Austria, IFA Cahiers, Vol 93B, 105.

8 Finance of partnerships is excluded from the scope of this article.

9 § 4 (4) EStG.

10 Sec 1079 EStR.

11 VwGH 30.11.1999, 99/15/0106.