An earnings stripping based interest deduction barrier has been implemented in Austria from 2021. Prior to that, Austria did not have a specific thin-capitalization rule but the tax authorities use a general debt-to-equity ratio of 4:1 (generally considered as a safe harbour) in determining whether equity funding is sufficient for a company. In some cases, interest payments on loans from direct or indirect shareholders exceeding that ratio were re-characterized as a constructive dividend and disallowed as a tax deduction.
On 17 December 2020, Austria implemented an interest deduction barrier in compliance with the EU Anti-Tax Avoidance Directive (ATAD). The restriction applies to tax years commencing after 31 December 2020 and covers all debt financing, including loans from non-affiliates. As per the rules, the deductibility of interest charges is restricted to 30% of EBITDA with a EUR 3 million safe harbour.
Excess interest is allowed to be carried forward indefinitely, and any unused interest capacity can be carried forward for a period of 5 years.
The interest deduction restriction rules do not apply:
- To stand-alone entities that are not part of a group;
- To loans used to finance a long-term public infrastructure project; or
- Where the taxpayer’s equity ratio (i.e., equity over its total assets) is lower than the group ratio by at least 2 percentage points.
The rules also provide grandfathering of loans concluded prior to 17 June 2016.