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Prohibition of Deductions for Interest and Royalties within a Group
With regard to payments of interest and royalties to group companies, a deduction prohibition applies if these are subject to “low taxation” in the receiving entity. The Federal Fiscal Court, however, allowed the interest deduction.
If interest or royalties are paid within a group and are subject in the recipient country to an effective tax burden of less than 10%, the payments made at the level of the Austrian subsidiary are not deductible. The provision is intended to prevent profit shifting through interest and royalty payments to jurisdictions with low‑tax regimes.
The Federal Fiscal Court (BFG) has now set aside an appeal and allowed the interest deduction for all years – on the one hand because the low taxation was based on a loss situation, and on the other hand due to concerns about the compatibility of the provision with EU law. According to the BFG, the deduction prohibition breaches the freedom of establishment, as it effectively only affects cross‑border cases and goes beyond preventing purely artificial arrangements. It is therefore compliant with Union law to restrict it to cases of abuse and non‑arm’s‑length interest.
Against this BFG ruling, the authority has lodged an administrative revision before the Administrative Court (VwGH). It therefore remains to be seen how the VwGH will assess the deduction prohibition for interest and royalty payments within a group.
The Federal Fiscal Court (BFG) has now set aside an appeal and allowed the interest deduction for all years – on the one hand because the low taxation was based on a loss situation, and on the other hand due to concerns about the compatibility of the provision with EU law. According to the BFG, the deduction prohibition breaches the freedom of establishment, as it effectively only affects cross‑border cases and goes beyond preventing purely artificial arrangements. It is therefore compliant with Union law to restrict it to cases of abuse and non‑arm’s‑length interest.
Against this BFG ruling, the authority has lodged an administrative revision before the Administrative Court (VwGH). It therefore remains to be seen how the VwGH will assess the deduction prohibition for interest and royalty payments within a group.