08.08.2024

Austria: Austria amends CFC rules to avoid double taxation due to Pillar Two

Key Facts

The EU’s recently adopted Pillar Two Directive applies on top of the Controlled Foreign Companies (CFC) legislation as implemented by the Anti Tax Avoidance Directive (ATAD)

Austria implemented the Pillar Two Directive in December 2023 and had already implemented a comprehensive CFC regime in 2018.

The Austrian parliament has recently adopted an amendment of the Austrian CFC Rule in § 10a of the Austrian Corporate Income Tax Act (CITA) in order to avoid potential economic double taxation.

Background

The EU’s recently adopted Pillar Two Directive applies on top of the Controlled Foreign Companies (CFC) legislation as implemented by the Anti Tax Avoidance Directive (ATAD). Austria implemented the Pillar Two Directive in December 2023 and had already implemented a comprehensive CFC regime in 2018. The latter obliges Austrian resident corporations to include the passive income of their foreign subsidiaries into their tax base subject to tax at a rate of currently 23 % if the residence state of the subsidiary effectively taxes at only 12,5 % or below.

Although the EU initially did not see a conflict between CFC legislation and Pillar Two, the OECD soon recognized the contrary: As the OECD acknowledged in its February 2023 Administrative Guidance, Qualified Domestic Minimum Top-up Taxes (QDMTTs) and the parallel application of CFC rules could lead to circular effects and might, if domestic CFC regimes do not recognize foreign QDMTTs, lead to economic double taxation. If the foreign subsidiary receives passive income and is lowly taxed, its income may be subject to a local QDMTT and, despite the QDMTT securing a minimum tax level of 15 % (above the 12,5 % required under domestic Austrian law), the CFC’s income might be subject to tax again at the level of its parent entity.

Amendment of the Corporate Income Tax Act

The Austrian parliament has recently adopted an amendment of the Austrian CFC Rule in § 10a of the Austrian Corporate Income Tax Act (CITA) in order to avoid potential economic double taxation. Accordingly,

any QDMTT levied in the residence state of a CFC must be included in the effective tax rate (ETR) computation for CFC purposes. Thus, Austrian CFC legislation won’t kick in if the foreign subsidiary of an Austrian parent entity is subject to a QDMTT leveling up the foreign ETR to 15 %. This legislative technique not only eliminates potential economic double taxation but, in most cases, even leads to a beneficial outcome for taxpayers: If Austria opted to just provide a credit for a foreign QDMTT as proposed by the OECD, CFC legislation would level up the ETR of the foreign passive income to 23 % instead of 15 %.

In situations where the Austrian CFC rule is triggered despite a foreign QDMTT (this might occur e.g. because the Pillar Two Substance-Based Income Exclusion (SBIE) reduces the foreign QDMTT leading to an ETR below 15 % for purposes of Austria’s CFC rule) any foreign QDMTT may be credited against Austrian CIT triggered by a CFC income inclusion at the level of the parent entity.

Source: ICON

For further information please visit the following link: PILLAR 2 | Austria avoids double taxation conflict with CFC-rules

Author

Mag. Matthias Mitterlehner

Partner

WTS Global International Corporate Tax GSL Co-Head & Europe Regional Leader

Austria | ICON Wirtschaftstreuhand GmbH, Austria

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Author

Valentin Bendlinger

Senior Consultant

Austria | ICON Wirtschaftstreuhand GmbH, Austria

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