Austria: Portfolio Dividends - A Follow-up

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

The Austrian government recently amended the respective Austrian international participation exemption to avoid the unequal treatment of foreign participations as compared to domestic participations. The previous provision contradicted the European principle of freedom of capital (see Baumann in Roadmap 2009).

The government's decision followed the Austrian Administrative Supreme Court, which ruled in 2008 that foreign dividends received from under 10% participations (so-called "portfolio dividends") are tax exempt1, and two appeals currently pending before the European Court of Justice (ECJ)2 in that regard.

Effective law

Up to the implementation of the amended international participation exemption, only dividend payments received from domestic corporations were exempt from corporate income tax in Austria, irrespective of the participation quote. In case of foreign dividends from participations of less than 10%, dividends were not tax exempt. The amended international participation exemption, which applies for all on 18 June 2009 open fiscal years, equates foreign portfolio dividends and domestic dividends.

As of the implementation of the new rules, dividend payments from EU member state corporations, and from corporations which are based in an EEA member state with an extensive administrative and enforcement cooperation treaty with Austria (at present only Norway), are exempt from Austrian corporate income tax. A minimum participation in the respective foreign participation of at least 10% is no longer required.

Dividend distributions from under 10% participations based in a non-EU member state or in a EEA member state without an extensive administrative and enforcement cooperation treaty with Austria are still subject to corporate income tax at the standard flat rate of 25%.

Tax credit or tax exemption

Even though the Administrative Supreme Court ruled in the above-named decision that the tax credit method and the tax exemption method (in case of withholding taxation on the dividend distribution in the foreign state) are basically equal to avoid double taxation of dividends, and that the tax credit method is to prefer because of less intervention into the current Austrian tax law, the Austrian legislator introduced the tax exemption method for EU/EEA portfolio dividends.

Anti-avoidance rule and switch-over to tax credit method

A special anti-avoidance rule has been implemented together with the above described amendments by which the tax credit method is to be applied instead of the tax exemption method if (i) the foreign corporation is not subject to corporate income tax in the foreign jurisdiction, (ii) the applicable corporate income tax rate is more than 10% lower than the Austrian corporate tax rate of 25% (i.e. at present less than 15%) or (iii) the foreign corporation is subject to a corporate income tax exemption in the state of residency. Under the tax credit method, the foreign corporate tax burden is credited against the Austrian corporate tax.

Outlook

As the Austrian legislator has not waited for the answer of the ECJ on the questions raised by the UFS in fall 2008, it is still questionable whether the amended international participation exemption is in line with EU principles.

Accordingly, the ECJ decisions are being eagerly awaited. According to recent amendments to the Austrian international participation exemption, taxation of dividends from EU and Norwegian participations of less than 10% is on a par with the taxation of domestic dividends. Taxation of such dividends is avoided by applying the exemption method. Two ECJ decisions are still outstanding in that regard, which could lead to further amendments of the respective rules.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

1 VwGH 17. 4. 2008, 2008/15/0064, RdW 2008/385, 424.

2 Vorlagebeschluss (EuGH) UFSL, GZ RV/0611-L/05 v 29. 9. 2008; Vorlagebeschluss (EuGH) UFSL, GZ RV/0493-L/08 v 29. 9. 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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