INTERNATIONAL TAX | Classification of Foreign Entities in Austria

What is a comparability test?

Austrian income tax law does not treat all types of entities equally. While corporations are generally treated as independent taxpayers and are subject to corporate income tax (Körperschaftsteuer), partnerships are not recognized as separate taxpayers. Income earned by partnerships is therefore not taxed at the entity level, but is instead attributed to and taxed at the level of the individual partners, irrespective of whether profits are withdrawn or not.

Where Austrian-resident persons hold interests in foreign entities or where foreign entities operate in Austria, the question arises as to how or whether the entity or its shareholder(s) should be taxed in Austria. The foreign entity must therefore be classified for Austrian tax purposes. This classification is carried out by means of the comparability test.

How is the comparability test conducted?

According to prevailing academic opinion, the comparability test is conducted in two steps. 

• First, the foreign corporate law basis of the foreign entity is examined and compared with the most closely corresponding domestic entity type. In a second step, the articles of association of the foreign entity are also examined (also called “individual-specific comparability test”).
• Second, an overall assessment is made as to whether, based on Austrian corporate law principles, the foreign entity more closely resembles a domestic corporate taxpayer (e.g. an Austrian GmbH, AG or private foundation) or a domestic partnership (e.g. OG, KG).

The company’s treatment under civil and tax law abroad is irrelevant in this context: "Only Austrian law is decisive for the purposes of comparability."  By its very nature, comparability does not require identity. Thus, a foreign company may still be classified as a corporation even if certain features, such as a statutory minimum share capital, are not provided for under foreign law, while other characteristics (e.g., limited liability, separate legal personality) clearly indicate that it is a corporation.

What criteria are examined in practice?

The criteria for the comparability test are set out in paragraph 134 of the Corporate Income Tax Guidelines 2013 (KStR 2013). The tax authorities identify five basic criteria that indicate comparability with an Austrian corporation:

• separate legal personality under foreign law,
• fixed, profit-independent share capital owned by the entity,
• participation of one or more persons in the share capital,
• limited liability for the entity's debts, and
• decision-making with the involvement of the shareholders.

In addition, the following aspects may also be relevant:

• unestricted transferability of shares to non-shareholders (i.e. no statutory requirement for consent of the other shareholders),
• contribution of share capital by means of capital contributions from shareholders, with no option to waive contributions or substitute them with the provision of services,
• requirement of registration in a public register for the entity to come into existence, and
• provisions relating to distributions and profit allocation.

When is a comparability test required?

The necessity of a comparability test depends on the specific facts and the applicable provisions of Austrian tax law. Such a test may be required from the perspective of either the foreign entity or the domestic shareholders. Where a foreign legal entity derives income in Austria, a comparability test is required, for example, to determine:

• whether limited tax liability arises at the level of the entity itself, or whether instead the (individual or corporate) shareholders behind the entity themselves become subject to limited tax liability in Austria;
• whether the entity is entitled to capital yields tax (KESt) relief under Section 21(1)(1a) CITA.

For Austrian-resident shareholders of foreign entities, the comparability test is relevant, for example, to determine:

• whether the entity's income is to be attributed directly to the shareholders or whether income is only to be recognized at shareholder level upon distribution from the foreign entity;
• whether - in in  the case of individual shareholders - income is subject to progressive taxation of up to 55% or whether the special flat tax rate of 27.5% applies for profit distributions; or
• whether - in the case of corporate shareholders - the participation exemption ("Beteiligungsertragsbefreiung") under Section 10(1)(6) or (7) and subsection (2) and Section 10(3) CITA may be claimed.

In certain provisions (e.g. Section 94(2) ITA or Section 10(2) CITA), the comparability test is replaced by a list of entity types set out in Annex 2 to the ITA (Anlage 2 EStG) that are deemed to qualify as corporations.  However, it remains disputed whether inclusion in Annex 2 actually renders a comparability test obsolete.

A brief look beyond Austria's borders…

Internationally, the rigid distinction between corporations and partnerships for tax purposes is by no means the norm. Many countries tax partnerships in the same way as corporations. Others even allow taxpayers to decide for themselves whether they want to treat a legal entity as transparent or non-transparent. Examples include the U.S. “check-the-box” regime or German law, which, starting in 2022, allows partnerships to be taxed as corporations without a change in its civil law form.

These differing national approaches can lead to qualification conflicts, e.g., when Austria treats a partnership as transparent, while another country treats it as a separate taxable entity, or vice versa. The consequence may be double taxation or double non-taxation.

Conclusion

The comparability test serves to classify foreign legal entities for tax purposes under Austrian law. According to the position of the Austrian tax authorities, such a comparability test must be substantiated by an expert opinion prepared by a chartered accountant or tax adviser subject to Austrian professional responsibility laws. Based on various characteristics it must be examined, whether the foreign vehicle more closely resembles a domestic partnership or a domestic corporation under Austrian law. The outcome of the comparability test is ultimately of material significance both for the tax treatment of the foreign entity and for that of its shareholders.

Do you have questions about the comparability test or require an expert opinion? Our International Tax team will be happy to assist!