The airline will base four Airbus A321 aircraft in Vienna, flying to 14 European destinations.
LEVEL flights to and from the Austrian capital will start on July 17 with a twice-daily Gatwick service and daily service to Palma.
Barcelona, Malaga, Venice and Olbia will follow in July.
The carrier will add Ibiza, Paris CDG, Milan Malpensa, Dubrovnik, Larnaca, Alicante, Valencia and Bilbao in August.
Willie Walsh, IAG chief executive, said: “We are launching this new short-haul subsidiary to provide Austrian consumers with more flight choices across Europe.
“These flights will be branded as LEVEL to build upon the huge success of our new long haul low-cost operation.”
British Airways owner IAG launched ow-cost long-haul airline LEVEL in March last year.
However, its Austrian-registered LEVEL subsidiary will, initially, focus on short-haul routes.
IAG also owns low-cost short-haul carrier Vueling, flying from its Barcelona base.
The group had been expected to take the Vueling brand to Vienna but has opted instead to place LEVEL there.
Vueling had been interested in Niki Lauda’s Laudamotion airline, also based out of Vienna, but Ryanair agreed a deal for the airline back in May.
The moves mirror that of eastJet, which also last year announced plans to create easyJet Europe based out of Vienna to ensure it had a European operating licence from an EU country.
While LEVEL is yet to launch in the UK, Walsh is yet to shy away from suggestions the carrier could set up a base at Heathrow where IAG already has a strong presence with BA.
Speaking at the Capa Global Aviation Summit in Heathrow last year, Walsh said IAG was preparing for Brexit and any airline ownership rules.
“IAG is a product of the EU, we intend to continue to look for opportunities,” he said.
“The concept of EU ownership is not by a lot of countries around the world. If BA is to fly to certain countries in the world we have had to demonstrate it is British owned and operated.”