INCORPORATING IN AUSTRIA

AUSTRIAN HOLDING COMPANIES

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

• Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.
• Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.
• Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Austria, while not having the worst EU holding company regime, is by no means the most attractive country in which to set up a holding company.

A new group taxation regime, brought in along with a reduction in corporate taxation from 34% to 25% in 2004, allows the offsetting profits and losses of group operations (requiring direct or indirect participation of more than 50%, but no other financial, economic or organizational integration) in Austria and abroad. This new group taxation system should offer interesting opportunities for foreign investors, in particular joint-venture structures, M&A transactions, headquarter companies and simple holding companies without active business, which can also participate in the tax group.

WITHOLDING TAXES ON INCOMING DIVIDENDS
As a member of the EU, Austria is governed by the provisions of the EU's Parent-Subsidiary directive, whose effect is that where an Austrian holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 24 months any dividends remitted by the EU subsidiary to the Austrian holding company are free of withholding taxes.

Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place) Austrian holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Germany from the subsidiary jurisdiction.

Austria has more than 50 double taxation treaties in place. (Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

CORPORATE INCOME TAX ON DIVIDEND INCOME RECEIVED
Income received by Austrian holding companies from foreign subsidiaries is subject to the standard rate of Austrian corporate income tax unless the Austrian holding company meets the criteria known as the "International Participation Exemption rules" in which case a special fiscal regime applies. To qualify for the fiscal benefits flowing under the "international participation exemption rules" the Austrian holding company must meet the following 4 criteria:

• Corporate Form: The foreign subsidiary must be a corporate body as per the definition set out in the EU Parent-Subsidiary directive whereas the Austrian holding company must be a corporate body as per the definition set out in national laws.

• Direct Shareholding: The Austrian holding company must directly own the shares in the foreign subsidiary. If the dividend income is dividend income from a subsidiary of the foreign subsidiary then the international participation exemption criteria are not satisfied.

• 25% Shareholding: The Austrian holding company must hold a minimum of 25% of the shares of the foreign subsidiary.

• 24 Months Time Period: The Austrian holding company must hold its 25% shareholding in the foreign subsidiary for a minimum period of 24 months prior to the distribution of dividend.

Dividend income paid by a foreign subsidiary to an Austrian holding company which meets the "international participation exemption rules" is treated in one of 2 ways:

• The Exemption Method: Under the exemption method no further tax is payable in Austria on the dividend income received irrespective of how much tax was paid in the foreign jurisdiction.

• The Credit Method: Under the credit method the dividend income received in Austria is assessed to Austrian tax but any tax paid in the foreign jurisdiction is credited against the final Austrian corporate tax liability. If the foreign tax exceeds the Austrian tax so that there is a tax credit in Austria this tax credit cannot be carried forward in the balance sheet and set off against future tax liabilities arising in Austria.

Clearly the exemption method is preferable. The credit method however automatically applies if the following conditions of anti-avoidance legislation are satisfied:

o Passive income: The foreign subsidiary's main source of income is "passive income" (interest, royalties, rental and lease income, capital gains from the disposal of shareholdings).

o Holding Company Ownership: More than 50% of the holding company's shares are owned by Austrian tax residents.

o Low Foreign Tax: The corporate income tax paid by the subsidiary in the foreign jurisdiction on the profits out of which dividends are paid is less than 15%.

(N.B. Dividend income received by an Austrian holding company from a resident subsidiary is exempt from corporate income tax in Austria and is subject to considerably less stringent criteria than the requirements applying to dividend income received by an Austrian holding company from a foreign subsidiary. Thus for example there is no minimum percentage shareholding requirement, no minimum time period requirement and no requirement that the shareholding should be direct).

CAPITAL GAINS TAX ON THE SALE OF SHARES
In Austria capital gains are taxed as corporate income. Capital gains made by an Austrian holding company on the profitable sale of its shareholding in a foreign subsidiary are subject to the standard rate of Austrian corporate income tax unless the Austrian holding company meets the criteria known as the "International Participation Exemption rules." To satisfy the "international participation exemption rules" for capital gains purposes a holding company must meet the following 3 conditions:

• Corporate Form: The foreign subsidiary must be a corporate body as per the definition set out in the EC Parent-Subsidiary directive whereas the Austrian company must be a corporate body as per the definition set out in its national laws.

• 25% Shareholding: The Austrian holding company must hold a minimum of 25% of the shares of the foreign subsidiary prior to the sale of those shares.

• 24 Months Time Period: The Austrian holding company must hold the 25% shareholding in the foreign subsidiary for a minimum of 24 months prior to the sale of the shares.

Where however the foreign subsidiary – Austrian holding company structure falls foul of Austrian anti-avoidance legislation (see above) the "international participation exemption rules" are suspended and any capital gains made on the profitable disposal of shares in the foreign subsidiary would be treated as corporate income and subject to standard Austrian corporate income tax at 34%
(N.B. Capital gains realized by an Austrian holding company on the profitable sale of shares in a resident subsidiary are subject to standard Austrian corporate income tax rates).

WITHHOLDING TAXES ON OUTGOING DIVIDENDS
There is a standard rate of 25% for withholding taxes on outgoing dividends. This amount can only be reduced in 2 circumstances:

• Where the parent corporation to which the dividends are remitted by the Austrian holding company is resident in another EU territory and holds at least 25% of the Austrian holding company's shares for a minimum period of 12 months prior to the dividend distribution. (N.B. Austria has anti-avoidance provisions aimed at non-EU parties attempting to benefit from the terms of the directive).

• Where the ultimate parent corporation is located in a jurisdiction with whom Austria has a double taxation treaty then the rate is generally reduced from the standard rate of 25% to a reduced rate of between 0-15%. Austria has more than 50 double taxation treaties.

AUSTRIAN v. DANISH HOLDING COMPANIES
Since Denmark is currently the benchmark holding company jurisdiction which other holding company jurisdictions seek to emulate a comparative assessment of the two jurisdictions is a useful exercise.
As members of the EU, and with approximately equal numbers of double tax treaties, the two countries are equivalent in terms of the imposition of withholding taxes by the jurisdiction from which a dividend emanates.

Withholding Taxes on Incoming Dividends:
As both Austria and Denmark are members of the EU both are bound by the terms of the Parent-Subsidiary directive under which dividends remitted from an EU subsidiary to an EU parent corporation which has held 25% of the subsidiary shares for a minimum period of 24 months are free of withholding taxes. So in this respect neither has an advantage over the other.
Where the EU Parent-Subsidiary directive does not apply the only means of reducing withholding taxes levied on incoming dividends remitted by the foreign subsidiary to the holding company is through double taxation treaties. Denmark has 78 double taxation treaties in place whereas Austria has 43 meaning that Denmark has considerably more scope than Austria for the reduction of withholding taxes on incoming dividends.

Corporate Income Tax on Incoming Dividends:
In Denmark dividend income received by a Danish holding company is exempted from corporate income tax irrespective of the jurisdiction in which the foreign subsidiary is located, provided that the Danish holding company meets the "participation exemption criteria" in that for a minimum period of 12 months prior to the dividend distribution it holds at least 20% of the shares of the foreign subsidiary (which subsidiary must not be deemed a "Controlled Foreign Corporation"). In Austria by comparison "the international participation exemption rules" only apply if 25% of the foreign subsidiary shares have been held by the Austrian holding company for a minimum period of 24 months.
Austrian anti-avoidance provisions are not severe, but Denmark is more permissive, having no minimum tax rate hurdle for taxation in the originating jurisdiction in any circumstances.

Accordingly in terms of corporate income tax levied on incoming dividends the Danish holding company is a considerably more flexible entity than its Austrian counterpart.

Capital Gains on the Sale of Shares:
A Danish holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held the foreign subsidiary's shares for a minimum period of 3 years prior to the disposal and the foreign subsidiary is not a "Controlled Foreign Corporation". An Austrian holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held at least 25% of the foreign subsidiary shares for a minimum period of 2 years prior to the disposal and the income of the foreign subsidiary is not deemed "passive income". However the crucial distinction in favour of Denmark is that in Austria anti- avoidance legislation suspends the capital gains tax exemption where the foreign subsidiary is located in a low tax or offshore jurisdiction such as Hong Kong or Gibraltar respectively.

Once again this makes the Danish holding company a considerably more flexible entity than its Austrian counterpart albeit the fact that the Danish participation exemption criteria are marginally harder to meet.

Withholding Taxes on Outgoing Dividends:
The standard rate of withholding taxes levied in Denmark on outgoing dividends is 28%. This rate can be reduced by both the provisions of a double taxation treaty and by the provisions of the EC Parent-Subsidiary Directive. Alternatively where the dividends are remitted by an intermediate Danish Holding Company to a foreign parent corporation no withholding taxes are deducted provided that there is a double tax treaty in force between the two countries, and:

• The foreign parent corporation holds a minimum of 20% of the shares in the intermediate Danish holding company. (N.B. If the shareholding is less than 20% then the double tax treaty rate will apply);

• The parent corporation is non-resident; and

• the shares must have been held by the parent corporation for a minimum continuous period of at least 12 months (if the shareholding is 20% but the shares have not been held for 12 months then a withholding tax rate of 30% will be levied on 66% of the dividend income making an effective rate of 22%).

In Austria either reduced or no withholding taxes are levied on outgoing dividends provided that either the EU parent/subsidiary directive applies (in which case no withholding taxes are levied) or alternatively provided there is a double taxation treaty in place (in which case withholding taxes are reduced from the standard rate of 25% to between 0-15%). Austria has 43 double taxation treaties in place.

Once again this makes the Danish holding company a considerably more attractive entity than its Austrian counterpart.

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