Investing in Austria


Investing in Austria

IFLR China Outbound Investment Guide, London 2012, 14-21
2012, May 15

Austria is located in the heart of Europe. From Vienna, all other European capital cities can be reached within less than three hours by flight. As a member state of the EU, Austria provides full access to the European internal market, which has the world’s largest gross domestic product.

Austria is recognised as the leading hub for doing business in Eastern and Southeast Europe. A disproportionately high number of foreign businesses have set up their Eastern European headquarters in Vienna, which is, although a western European capital, located further east than Prague.

Breadth of cultural activities, environmental quality and high living and security standards make Vienna regularly number one in international rankings on the best quality of life in the world.

However, foreign businesses invest in Austria not only for practical and geographical reasons, but because of the investor friendly legal environment. Among other relevant factors, the Austrian legal system provides legal certainty, an investor friendly tax system, a flexible company law and an ideal framework for holding companies.

Framework for foreign investment

The Austrian legal system places hardly any restrictions on foreign investments. In particular, Austrian law does not require the participation of local partners for certain activities. A minor exception to this general rule applies to substantial acquisitions in the area of public security and public order.

Furthermore, Austrian company law does not differentiate between Austrian invested and foreign invested enterprises. Governmental permission is not required to incorporate a foreign invested company in Austria.

In addition, although there are certain restrictions on foreigners purchasing land (these are regulated on the provincial level and vary from region to region, whereby Vienna is among the most foreigner friendly) there are no such restrictions to foreigners entering into rental agreements.


Limited liability company – GmbH
In most cases, foreign investors set up their Austrian subsidiaries in the form of a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH). This legal form essentially combines a limitation of liability for shareholders with tight control over the business activities of the subsidiary, in particular by way of binding instructions to the management. Furthermore, the GmbH provides considerable flexibility with regard to the rights of shareholders (e.g., voting rights, profit distributions and consent requirements). The minimum registered capital is €35,000 (currently approximately US$47,000), of which – in the case of cash contributions – at least €17,500 has to be paid in prior to registration; upon registration the GmbH is free to use these amounts. Rather than receiving a physical share certificate, each shareholder holds a quota share corresponding to a certain registered capital contribution and essentially consisting of a bundle of rights and obligations.

Stock corporation – AG

The other main legal form available under Austrian law that allows for a limitation of liability is the stock corporation (Aktiengesellschaft – AG). Compared to the GmbH, however, the form of an AG is less flexible and the shareholders have less control over the business. Furthermore, a stock corporation is legally required to have a supervisory board whereas a GmbH must have a supervisory board only upon reaching a certain size (e.g., more than 300 employees or more than 50 shareholders with registered capital exceeding €70,000) or when conducting certain types of business (e.g., investment companies). Moreover, the procedure for forming an AG is more complicated and costly than that of a GmbH. The minimum registered capital is €70,000, of which at least 25% must be paid in prior to registration. Compared to the GmbH, where the transfer of shares requires the drawing up of an Austrian notarial deed, shares in an AG can be transferred comparably easy: Bearer shares (Inhaberaktien) are transferred by simple physical transfer, name shares (Namensaktien) by endorsement.

Holding company

An Austrian holding company may be established either in the form of a GmbH or in the form of an AG. Most holding companies are established in the form of a GmbH.
Austria offers a number of substantial advantages for holding companies, including:

  • a national participation exemption (for details see below);
  • an international participation exemption (for details see below)
  • a modern group relief system (for details see below);
  • the tax deductibility of financing costs;
  • an extensive network of double taxation treaties (especially with Eastern European countries) providing for low dividend withholding tax rates;
  • no domestic withholding tax on interest payments to non-residents;
  • no provisions regarding foreign controlled companies;
  • the possibility of obtaining tax rulings, confirming the tax treatment of a specific situation in advance; and
  • the flexibility of Austrian company law.


Austrian corporations are subject to a corporate income tax rate of 25%. There exists no special corporate status for a holding company.

National participation exemption

Under the national participation exemption, dividends resulting from qualifying participants are tax-exempt. The following conditions must be fulfilled:

  • an Austrian entity subject to corporate income tax (parent), e.g., a stock corporation or a limited liability company,
  • has a participation, whether direct or indirect,
  • in an Austrian corporation or a company with a legal form listed in the Annex to the EU parent/subsidiary-directive, or in a corporation
    resident in a third country that allows for extensive mutual administrative assistance (subsidiary).


If these conditions are met, any dividends received by the parent through its participation in the subsidiary will be exempt from Austrian corporate income tax, regardless of the extent of the participation and regardless of any holding period.

International participation exemption

Under the Austrian international participation exemption, dividends and capital gains resulting from qualifying participations are tax exempt. The following conditions must be fulfilled for the international participation exemption to apply:

  • an Austrian corporation (parent),
  • has a direct or indirect participation of at least 10% in the share capital
  • of a foreign company (subsidiary) which is comparable to an Austrian or EU corporation (as opposed to a partnership),
  • with the participation having been held for an uninterrupted period of minimum one year.

If these conditions are met, the following will be exempt from Austrian corporate income tax: (i) any dividends received by the parent from its participation in the subsidiary; and (ii) any capital gains realised by the parent upon the sale of its participation in the subsidiary.

As a result, dividends and capital gains as well as losses or other changes in value of a subsidiary are in principle tax neutral. However, there is the option to declare a participation as tax effective. This option has to be exercised in the year of the acquisition and is non-revocable. Upon exercising this option, capital gains resulting from that participation or other changes in value of the subsidiary become taxable and losses tax deductible.

Sec 10 (4) of the Austrian Corporate Income Tax Act (Körperschaftssteuergesetz) contains a special anti-abuse provision relating to the international participation exemption. This provision applies if both of the following conditions are clearly fulfilled or one of them is substantially exceeded and the other one is closely met:

  • the subsidiary focuses on earning passive income (i.e., interest income, rental income, income from royalties and income from capital gains) as opposed to engaging in an active trade or business;
  • the subsidiary’s effective tax burden is less than 15%.

In this case, the international participation exemption is replaced by an indirect foreign tax credit system (switch-over). Thus, if the subsidiary is a company in a low tax jurisdiction earning only (mainly) passive income, the anti-abuse provision would apply and dividends received by the parent from the subsidiary would be taxable at a rate of 25%, with the possibility of receiving a tax credit for foreign withholding taxes and taxes on underlying income of the subsidiary.

Group taxation

Financially linked companies may form a group of companies for tax purposes (tax group – steuerliche Unternehmensgruppe) with the legal effect that the taxable profit/loss of any business year of each group member is assigned to and taxed at the level of the group leader.

One of the basic requirements is that the companies are financially
linked in a way that one company owns directly or indirectly more than 50% of the shares and the voting rights in another company. The group of companies shall exist for a minimum period of three years. In case a group member leaves the group during this minimum term, any assignment of profits or losses to the group leader is cancelled retroactively.

One of the main advantages of the group taxation is that losses generated by any group member may be offset against the profits generated by other group member(s) at the level of the group leader. Also foreign subsidiaries may become group members. As a consequence, foreign losses become deductible for tax purposes in Austria (whereby a double use of losses is excluded).

Where there is the acquisition of an operative company by a group member, a depreciation of goodwill is also allowed in case of a share deal. The goodwill is calculated as the difference between the equity of the acquired company plus hidden reserves contained in the non-depreciable fixed assets on the one side, and the acquisition cost on the other side. Any such goodwill is capped at 50% of the acquisition cost. The calculated goodwill will be depreciable on a straight-line basis over 15 years.

Branch office

Instead of establishing a (holding) subsidiary, some foreign businesses establish for minor investments a branch office (Zweigniederlassung). This is not limited to certain types of businesses but the branch office has to be registered with the Austrian Companies Register. Foreign enterprises with their corporate seat outside of the EU and the European Economic Area (EEA) must designate a permanent representative residing in Austria. A branch office does not have a legal personality separate from its ‘parent’ company, so that contracts concluded with the branch office are concluded with the foreign legal entity itself. The decision to establish a subsidiary or only a branch office will depend mainly on tax and liability considerations.

Investment via M&A

Previously, Chinese businesses mainly invested in Austria by establishing their own subsidiaries and simply selling their products and services in the Austrian and (Eastern) European market. More recently, Chinese investors have also entered the Austrian market through mergers and acquisitions.

The acquisition of an established business has the main advantage of providing immediate market penetration. The existing trade ties to – often Eastern – Europe can also be instantly used. In addition, most of the interesting Austrian targets are also active in China so that synergies can be achieved in the investor’s home market too.

When mergers exceed certain thresholds, Austrian law requires clearance by the Austrian merger control authorities before the merger is put into effect. European merger control regulations
can also apply, in addition to national legal provisions, when an even higher threshold has been crossed.

Share deal or asset deal?

Generally speaking, straight forward M&A transactions are usually structured as share deals. However, as the legal identity of the target company remains unchanged by a share deal, the purchaser takes over the target with all its liabilities. This can be undesirable for an investor, in particular, when acquiring a distressed or insolvent business. In such a situation, an asset deal might be the better option, as in principle they allow the investor to exclude certain unwanted assets and liabilities
from the purchase. However, this option is limited by Austrian law – in particular by the following provisions, which provide for an automatic transfer of liabilities with the transfer of underlying assets:

  • Pursuant to sec 1409 of the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch), the purchaser is liable for any pre-existing debts of the acquired business that he knew or should have known about. This provision is mandatory law but the extent of the liability is capped with the value of the acquired assets.
  • Pursuant to sec 38 of the Austrian Business Code (Unternehmensgesetzbuch), the purchaser is liable for any pre-existing debts of the acquired business. The extent of this liability is not capped but the liability can be excluded by agreement. Such an exclusion of liability, however, becomes only valid towards third-party creditors if registered with the Companies Register or otherwise appropriately made public or if notified to the third-party creditor directly.

Other statutes provide for more specific liabilities for prior debts, for example, in respect of social insurance contributions and taxes.

The need for due diligence
The above shows that a due diligence review of the target is essential. In some instances, liabilities can be contractually excluded. In other instances, respective representations and warranties should be agreed upon to reduce the risks arising out of an acquisition.

In this context it is important to note that, under Austrian law, a purchaser could be considered as having waived his claims with regard to a defect on which the seller offered specific information but the purchaser refused to conduct a due diligence review. This might even apply to instances where a purchaser failed to request certain information from the seller.

Acquisition vehicle
A foreign investor may purchase an Austrian target directly or through an acquisition vehicle.

Austrian holding company
As explained above, an Austrian holding company provides many advantages, some of which make it a particularly useful acquisition vehicle.

Non-resident intermediate holding company

A non-resident intermediate holding company may be an option in cases of more favourable tax treaties between Austria and other jurisdictions, compared to the Austrian-Chinese tax treaty.

Dividends paid out by Austrian corporations to non-resident shareholders generally trigger a withholding tax of 25%. If a tax treaty provides for a lower withholding tax rate, the tax authorities
will refund the excess amount (most double taxation treaties to which Austria is a party provide for a maximum rate of between 5% and 15%). Under some agreements, treaty relief may be granted at the source if certain conditions are met.
Under the Austrian provisions implementing the EU parent/ subsidiary-directive, however, outbound dividends are totally exempt from any withholding tax under the following conditions:

  • an EU company with a legal form listed in the annex to the EU parent/ subsidiary-directive
  • has a direct participation of at least 10% in the share capital
  • of an Austrian corporation
  • with the participation having been held for an uninterrupted period of at least one year.

However, tax at source must be withheld temporarily if the dividends are distributed within the one-year holding period; a refund will be granted as soon as the one-year holding period has expired. According to a ruling issued by the Austrian Ministry of Finance, no temporary withholding is necessary if the taxpayer provides evidence that the shares will likely be held for a period exceeding one year and if sufficient security is provided.

Tax at source must also be withheld in the case of an abuse of law and constructive dividends. Abuse of law does not exist if the EU parent company states in writing that it derives its income from active business, that it employs its own personnel and that it maintains its own business facilities.

Acquisition funding

A purchaser has to decide on the debt/ equity portions of the funding of an acquisition. In this context, the main advantage under Austrian law is that interest on loans for the acquisition of a participation is tax deductible. The most common way to deduct interest expenses and to offset them against the target’s taxable income is the acquisition of a business via an Austrian corporate acquisition vehicle, followed by the establishment of a tax group.

Trade law

Depending on the type of business activity of a newly established company or branch office, a simple notification or an application for a trade licence with the competent trade authority may be required. Moreover, legal entities have to appoint a suitable trade representative. In case the business activity is a so called regulated trade (reglementiertes Gewerbe), the trade representative must fulfil certain requirements of professional training and/ or professional experience. The trade representative may either be an executive or an employee of the company, and has to reside in Austria or another EU or EEA member state (to the latter, certain exceptions apply in case of bilateral agreements between Austria and the third state or in case of reciprocity; these exceptions are, however, not relevant with regard to China).

Employment of foreigners and residence permits

In cases where third country nationals are to be employed with the company or the branch office, they would have to obtain employment permits under the terms of the Austrian Aliens Employment Act (Ausländerbeschäftigungsgesetz) and a residence permit under the Austrian Act on Residence and Sojourn (Niederlassungs- und Aufenthaltsgesetz). Since July 1 2011, amendments to these statutes replaced the former general key employee concept by a set of four schemes for highly skilled third country nationals. They established an essentially merit-based points system in lieu of the former quota system. EU/ EEA citizens (except for Romanian and Bulgarian nationals) and Swiss nationals are free to live and work in Austria.

Final remarks

Austria has a lot to offer to foreign investors – particularly from a legal perspective. However, to make use of the advantages of the Austrian legal system and to avoid potentially negative implications for investments requires sound legal advice on an individual basis. In response to a continually growing demand for legal advice on business between China and Europe, DORDA BRUGGER JORDIS established a ‘China Desk’. Best acquainted with the characteristics of the local markets and culture, DORDA BRUGGER JORDIS also creates communicative and strategic conditions to successfully enter the Austrian market. We look forward to assisting you in investing in Austria.




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