Investment holding companies in form of a corporation (eg Austrian GmbH) are partly used for investments in startups. Depending on the purpose of the investment, an intermediary corporation may be more advantageous than a direct investment by the investor ad personam. In this context the following is a brief overview of various constellations and the associated tax consequences.

 

1. Possible scenarios and their tax effects

Austrian investment holding company with Austrian shareholder

If an investment holding company generates dividend income from a domestic or foreign startup investment, these dividends can be basically received tax-free – regardless of the investment amount – so that an operational reinvestment is possible without tax abrasion (in cross-border constellations, foreign withholding tax aspects would have to be coordinated separately). In contrast, dividend income for private individuals is taxed at 27.5%.

If, on the other hand, the focus concerning the participation in the startup is predominantly on capital gains, the following has to be considered: At the level of a corporation the sale of a participation in a domestic startup is considered as a normal taxable transaction (25% corporate income tax; tax rate to be reduced by 1% in both 2023 and 2024). If the profit is distributed subsequently by the holding company to the shareholders it is taxed again (27.5%). In the case of a participation in a foreign startup a tax free exit realisation is possible if the international participation regime is applicable (i.e. participation ≥ 10%, holding period ≥ 1 year). Again in comparison the sale of a domestic or foreign participation by a private individual is taxed at 27.5%.

 

Foreign investment holding company with Austrian shareholder

With regards to foreign investment holding companies, the tax treatment of dividend distributions and capital gains need to be analysed with a local tax advisor. With regards to foreign holding companies, capital gains could be taxed more favourably in some cases than in Austria (e.g. in Germany capital gains are – independently from the participation amount – basically taxed in total at 1.5%).

However, in the case of a foreign investment holding company with an Austrian shareholder, it has to be checked in advance whether the setup is consistent with the overall picture of the circumstances of the investor and if the cross-border structure is ultimately recognized from the tax authorities of the involved countries. The recognition of a foreign investment holding company in the course of a cross-border structure requires, in principle, non-tax reasons for the structure and the existence of corresponding substance (e.g. employees, own business premises and local management managing the investments).

As the abuse of shell companies is a current issue, an EU directive to combat the abuse of shell companies for unfair tax purposes is being drafted. The directive should lead to certain transparency standards and is scheduled to enter into force on January 1, 2024. The current draft also addresses a certain minimum substance.

 

2. Conclusion

It must be analyzed on a case-by-case basis depending on the structure and the pursued goals of the investor whether the interposition of an investment holding company can be advantageous from tax perspective for start-up investments. In this context various aspects must be taken into account (decisive criteria are amongst others extent of participation, operational reinvestment considerations, whether the interest is in current dividends or one-time exit proceeds and how the company is established).

Insofar as the establishment of an investment holding company would be conceivable in addition the tax-optimal implementation of the structure as well as the requirements for the recognition of the structure need to be analysed. Especially in the case of cross-border structures, the further development at EU level with regard to the substance requirements for foreign structures remains to be seen.

 

Authors:

Christoph Puchner, Managing Partner and Tax Advisor &
Bianca Habitzl, Tax Manager from ECOVIS Austria, one of the leading tax consultants in Austria in the startup sector.