Increase in R&D Premium
The R&D premium, which is currently set at 12%, is a form of state aid available to taxpayers carrying out research and experimental development. On January 1, 2018, the R&D premium will be increased to 14%.
The premium applies to any R&D activities pursued in Austria by an Austrian entity or by the Austrian permanent establishment (PE) of a non-Austrian entity, as well as to contract R&D activities of an EU/EEA researching entity that is not related to the principle. As defined by the Frascati Manual, eligible R&D activities are: (i) fundamental research, (ii) applied research, and (iii) experimental development.
Other than in contract research scenarios, an annual opinion of the Austrian Research Funding Commission on the eligibility of the research activities is required.
The R&D premium covers: (i) salaries and remuneration paid to self-employed researchers; (ii) direct expenses and investments for R&D; and (iii) fixed costs (and financing expenses if directly attributable to R&D activities).
The R&D premium takes the form of a tax credit which is directly credited to the taxpayer’s tax account. Therefore, the premium does not lead to taxable revenues; i.e., it is tax neutral. The R&D premium for contract research t is limited to annual expenses of EUR 1 million.
The current definition of a PE in the OECD Model Tax Convention requires the physical presence of the taxpayer – for example, by way of a fixed place of business or at least the physical presence of a dependent agent in the source state. Without this physical presence, the source state may currently not claim any taxation right for profits realized within the jurisdiction.
This concept is not suitable for the digital economy (e.g., online stores, software app development, and so on) where hardly any physical presence in the state in which the customer is resident is needed. Therefore, many companies engaged in the digital economy will not be subject to income taxation in a number of states despite achieving substantial turnovers and having significant customer bases there. If such entities are also domiciled in a low taxation/no taxation state, double non-taxation may occur.
In light of media coverage in the last couple of years on the tax structures of large multinational companies, the OECD addressed the difficulties related to collecting tax from companies in the digital economy in its BEPS report, and there is an ongoing discussion in Austria about how to deal with these challenges as well. One alternative being discussed is the introduction of a significant presence permanent establishment. In this scenario, data related to turnover or customers – or a combination of the two – may be introduced as criteria for constituting a PE in the source state, irrespective of any physical presence. As a result, the profit attribution to the PE will become more complex, given that the current approach – which predominately considers business’ significant people as the relevant criterion for attributing profits – will no longer fully apply to these scenarios. Alternatively, the state may consider introducing withholding taxes on fees paid for these services or introducing an equalization levy on turnovers. Based on statements of the Austrian Ministry of Finance, taxing the digital PE will be one of the main targets to be pursued during Austria’s EC Council Presidency in the second half of 2018.
BEPS Implications – Interest Barrier Rule
Pursuant to the EC Anti-BEPS Directive, interest barrier rules are to be introduced on or before Dec 31, 2018. These rules are aimed at restricting the deductibility of net interest with a maximum amount of EUR 3 million or an amount corresponding to 30% of the company’s EBITDA.
In fact, back in 2014 Austria introduced a restriction on the deductibility of intra-group interest and royalty payments. This non-deductibility applies to any intra-group payments of royalties and interest where the recipient’s income is subject to a taxation of below 10%. The low/no taxation applies where: (i) there is an exemption in person or in kind on the level of the recipient; (ii) the nominal tax rate is less than 10%; (iii) the effective tax liability is less than 10%; or (iv) there is a tax benefit by way of a refund to the company or its shareholders resulting in an effective tax liability of less than 10% of the income. These domestic rules can be maintained until the end of 2023.
By Michaela Petritz-Klar, Partner and CEE Head of Tax, Taylor Wessing Vienna
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.