Austria

Johann Muehlehner KPMG in Austria Tel: +43 (1) 31 332 292 email: jmuehlehner@kpmg.at

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2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

2 Derivatives: International Tax Handbook Austria

Introduction
Austrian legal entities are subject to 25 percent corporation tax on their worldwide income. Taxable profit is computed as the difference between the income from any source and the expenses that are incurred for the purpose of obtaining such incomes in a fiscal year (i.e. accounting profit under statutory accounts), plus non-deductible expenses and less non-taxable revenues. The underlying principle in Austria is that tax accounting should be based on commercial accounting (Massgeblichkeitsprinzip). Consequently, the computation for tax purposes is based on the results shown in the annual accounts, adjusted in accordance with tax legislation. In determining taxable profit, income and expenses generated by the execution of derivative financial instruments, booked according to accounting regulations, are treated as income and expenses and are taken into account in determining the taxable profit. Foreign legal entities carrying on an activity through a permanent establishment (PE) in Austria are required to pay 25 percent profit tax on the taxable profit which is attributable to the PE. The PE definition provided under the Austrian tax law is similar to that provided in the OECD Model Tax Convention. Under Austrian tax legislation, branches of foreign entities are required to determine their taxable income attributable to the Austrian PE according to Austrian GAAP and tax provisions. Thus, for the computation of the profit of the PE the accounting principles of commercial law shall be applicable unless mandatory provisions of the (Corporate) Income Tax Act require otherwise.

General rules There are no specific tax rules regarding the taxation of derivatives. Consequently, general tax principles are applicable. The tax treatment of derivatives in Austria (i.e. the recognition of incomes and expenses for tax purposes) should follow the accounting treatment accepted for such derivative instruments. Thus a company in general is taxed on its derivative contracts in line with the accounting treatment. Sections 195 and 201 of the Austrian Commercial Code (Unternehmensgesetzbuch, UGB) incorporate the accounting conventions that might be considered as the Austrian generally accepted accounting principles (GAAP). These principles include: The revenue recognition principle: This principle defines when an entity may record assets and liabilities at the higher of historical cost or production cost. The expense recognition principle: An accounting entity is required to provide for all possible losses and if there is any doubt about an assets realizable value, the asset should be written off. The matching principle: Matching generally means that expenses incurred in generating revenue realized in a particular period must be reported in the same period. The principle of conservatism: The basic idea underlying this principle is that expected but unrealized revenues must be ignored and expected unrealized losses must be recognized. The objective of these accounting principles is to present a conservative view of the financial position of an entity and not to overstate income. Accounting principles applicable for certain types of entities (e.g. banks) but deviating from those mentioned above may potentially be recognized for tax purposes (e.g. fair value accounting). Derivatives include options, futures and contracts for differences and most vanilla and exotic derivatives, in particular since the term contracts for differences captures any contract determined by reference to the price of any property (including for example shares) or an index and most cash settled derivatives. Concerning the deductibility of payments made under derivative agreements (i.e. commission fees paid to brokers, call/put premium, interest on margin loans or losses resulting from derivative transactions), the general deductibility requirements must be fulfilled (i.e. expenses are deductible only to the extent that they are directly connected with income from a taxable source).

2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

3 Derivatives: International Tax Handbook Austria

Special rules There are special rules to deal with hybrid instruments (instruments that have embedded derivatives) and derivatives entered into for hedging purposes, e.g. a convertible or an exchangeable bond. In relation to hybrid instruments, the tax treatment normally seeks to mirror the accounting treatment (i.e. taxing the debt element of the vanilla bond under loan relationship rules and the derivative under derivative or capital gains rules). Hedge accounting rules require the company to match the period of profit (or loss) recognition related to a derivative instrument with the hedged item. Hedging instruments can only be derivatives whose fair value or cash flows are expected to set-off changes in fair value or cash flows of hedged items. Withholding tax (WHT)

Financial futures Cash settled financial futures do not fall under the scope of VAT. Non-cash settled financial futures contracts involve an underlying deliverable in securities. Such a supply of a non-cash settled financial futures contract is exempt. Financial Options Generally, financial options are exempt from VAT. The sale of an option as a financial instrument is a supply of services separate from the underlying transaction to which the option relates. Physical futures The VAT liability of physical futures, generally, follows the treatment of the underlying supply (e.g. wheat, gold, oil). Stamp Duty

The Austrian tax law does not include the income obtained by non-residents from trading of derivatives in the category of income subject to WHT. Indirect tax/VAT Overview As a general principle, under the Austrian tax law, banking and financial services qualify as VAT exempt without credit operations. Thus, input VAT related to income not subject to VAT is not recoverable. The VAT liability of physically settled futures generally follows the treatment of the underlying supply. The standard VAT rate is 20 percent.

Derivative contracts should in general not be subject to any stamp duties. However, in practice, the legal nature of the derivative transaction should be analyzed carefully. Austrian stamp taxes are levied on various legal transactions concluded in written form. The types of legal transactions, which are subject to tax, are, for example, assignment agreements and loan agreements. It is not the legal transaction, as such, which triggers the tax but with a few exceptions the written instrument executed to document the transaction. Under the currently applicable Austrian law, legal documents executed outside of Austria are subject to Austrian stamp duty only if all parties to the agreement are Austrian residents or where the written document evidencing the transaction is physically brought into Austria in the original or in the form of a notarized copy, provided that the legal transaction has legal effect in Austria or a legal obligation is assumed under the legal document or will be performed in Austria.

2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

4 Derivatives: International Tax Handbook Austria

Typical transaction Set out below is a typical derivative transaction that an Austrian bank may enter into together with an overview of the Austrian tax consequences. Facts: 1. Company A wants upside exposure to the performance of shares in a Spanish company, but it does not want to purchase underlying shares. 2. Company A enters into a total return swap1 over the Spanish shares with an Austrian Bank for a term of, say, 4 months. 3. Austrian Bank hedges its short position under the swap by purchasing a corresponding amount of the underlying Spanish shares from the market Austrian Bank will hold the shares for the term of the swap. 4. Austrian Bank would fair value the total return swap and the hedge under IAS 39. 5. The derivative contract may straddle a dividend payment on the underlying Spanish shares.

Austrian tax treatment for Austrian Bank: 1. There are no specific tax rules for derivatives financial instruments (e.g. hedging of underlying shares). Therefore, the tax treatment should follow the accounting treatment according to Austrian GAAP. Fair value amounts recognized in the P&L are generally accepted as assessable/deductible for tax purposes. 2. No Austrian withholding tax should be due on any payments made to Company A under the contract. 3. If during the term of the contract a dividend was paid on the shares, from an Austrian tax perspective the shares and dividend would most likely be considered to be beneficially owned by Austrian Bank it is unlikely that the existence of the derivative contract would in practice impact the question over who was beneficially entitled to the dividend. This may be important for example from a withholding tax perspective (although the view of the foreign tax authorities, in this case in Spain, would of course also influence the precise withholding tax position). 4. Although not relevant for the scenario under consideration, it should be noted that Austrian legislation has specific manufactured dividend rules that would apply in relation to dividend compensation payments made under stock lending transactions if certain requirements are met. 5. It is likely that the Austrian tax authorities would take the view that where shares are transferred from A to B by way of a stock loan, and B holds onto the shares, then it is B that should be considered to be the beneficial owner of the shares. Nevertheless, due to a specific provision, dividend compensation payments under a securities lending transaction in respect of domestic shares made by the borrower, if a bank, would be subject to Austrian dividend WHT.

Under standard ISDA documentation.

2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.