This Newsletter regarding current developments of Austrian tax law covers:
- some tax law changes foreseen by the Draft Budget Supplementary Act 2012 of the Ministry of Finance,
- a recent decision of the Administrative Court (VwGH, Austria's highest tax court) regarding real estate transfer tax in connection with trustee structures, and
- statements of the Federal Ministry of Finance (BMF) about selected international tax law issues.
A. The ministerial legislative proposal for the Budget Supplementary Act 2012 has been published
On September 27, 2011 the ministerial legislative proposal for the Budget Supplementary Act 2012 (Draft-BBG 2012) was published. The main points of the proposal are the amendment of the Income Tax Act, the Foundation Entrance Tax Act (Stiftungseingangsteuergesetz) and the Real Estate Transfer Tax Act (Grunderwerbssteuer) as well as the implementation of the EU Council Directive concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (2010/24/EU of March 16, 2010) by the EU Enforcement Assistance Act (EU-Vollstreckungsamtshilfegesetz). In the following we only give attention to changes we believe are most relevant.
1. Amendments of the Income Tax Act
The changes of the Draft-BBG 2012 provide that the loss offsetting regarding assets generating capital income would not have to be achieved by way of filing a tax return, but instead by a comprehensive and ongoing loss off-setting carried out by the custodian bank. Investors would generally benefit from this new loss off-setting rule, custodian banks would have to bear a further administrative burden in addition to imposing withholding taxes.
The loss off-setting shall generally cover all income and losses that are realized in all custodian accounts managed by a custodian bank. If losses are incurred, the taxes resulting from a later gain shall be reduced by the loss. If gains are realized that are not offset by a former loss, first withholding tax shall be withheld and paid; a later loss will result in a credit. The credit is capped with 25% of the losses. Impossible would be the off-setting regarding income from custodian accounts in escrow, from common custodian accounts and in particular the off-setting with business income.
The ongoing loss off-setting would become effective as of January 1, 2013. For the period April 1, 2012 through December 31, 2012 the loss off-setting would be conducted in the way of a final statement (Endabrechnung) until April 30, 2013.
Zero-coupon bonds (Nullkuponanleihe)
Income from zero-coupon (or interest free) bonds would, according to the changes of the Draft-BBG 2012, be considered income from capital gains, not interest income (as qualified by the current law), irrespective of whether they result from the redemption or from the sale before due date (Stückzinsen). Due to this qualification no final taxation (Endbesteuerung) will apply on zero-coupon bonds held as business assets.
Silent participation (stille Beteiligung)
The redemption excess from silent participations (Abschichtungsüberschüsse) that were entered into before April 1, 2012 shall be considered income from capital gains.
Enlargement of tax effective donations
In light of a decision of the European Court of Justice (June 16, 2011, C10/10) the provision regarding tax deductible donations to certain institutions would – according to the Draft BBG 2012 – be enlarged so that not only Austrian, but also EU/EEA institutions are covered.
2. Amendments of the Foundation Entrance Tax Act (Stiftungseingangssteuer) and of the Real Estate Transfer Tax Act (Grunderwerbssteuer)
The use of the (historical) common tax value (Einheitswert) for assessing the tax base of real estate under the Foundation Entrance Tax Act was considered unconstitutional (VfGH March 2, 2011, G 15/11). Therefore, the Foundation Entrance Tax Act and the Real Estate Transfer Tax Act should be amended.
The ministerial legislative proposal foresees that a provision should be included in the Foundation Entrance Tax Act that states that contributions of real estate are general exempt from the Foundation Entrance Tax. At the same time a raised tax rate (Stiftungseingangssteueräquivalent) amounting to 6% (3.5% + 2.5%) shall apply under the Real Estate Transfer Tax Act if real estate is transferred to a foundation for free or if the consideration is less than half of the fair market value (gemeine Wert) of real estate transferred to a foundation. As a result the Foundation Entrance Tax would be replaced by the Real Estate Transfer Tax in such a case; the taxation, however, remains the same: The transfer of Austrian real estate was charged with 6% tax on three times the common tax value under the current law (2.5% Foundation Entrance Tax and 3.5% equivalent of Real Estate Transfer Tax calculated from three times the common tax value). Due to the amendment of the respective laws there would be no change, since 2.5% equivalent of the Foundation Entrance Tax and 3.5% Real Estate Transfer Tax would be charged on three times the common tax value. For foreign real estate the Draft-BBG 2012 foresees a special treatment: While the contributions of foreign real estate into a Foundation were charged with 2.5% Foundation Entrance Tax such a transaction would be tax exempt pursuant the Draft-BBG 2012.
3. New Directive on Mutual Assistance for Tax Claims
The EU Council Directive concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures would be implemented into Austrian law by the EU Enforcement Assistance Act. As of January 1, 2012 the new Directive replaces the Directive of 1976. Due the essential amendments the Austrian Ministry of Finance decided that a new version of the EC Enforcement Assistance Act would be reasonable.
The EC Enforcement Assistance Act and the draft EU Enforcement Assistance Act both have a different scope than the Administrative Assistance Implementation Act (Amtshilfe Durchführungsgesetz) that implements the principles of the OECD regarding administrative assistance. Pursuant to the draft of the EU Enforcement Assistance Act the bank secrecy cannot be used as the exclusive reason for a refusal of administrative assistance, i.e. the bank secrecy is softened further, after the Administrative Assistance Implementation Act already softened it in 2009.
B. Real Estate Transfer Tax in connection with trustee structures
If all shares in a company that owns real estate are united in the hand of one acquirer (or in the hand of companies that constitute a fiscal unit) the transfer is subject to real estate transfer tax. Therefore, it is a commonly used structure to have a minority share be held by a trustee, instead of transferring the entire participation; according to established case law a unification of shares in one hand was not considered to have occurred due to the transfer of the majority share, even if from an economic perspective the majority shareholder controlled 100% of the company at stake.
In a special case the Independent Fiscal Tribunal (Unabhängiger Finanzsenat – UFS; 25 June 2010, RV/0226-I/09) followed the prevailing literature and case law. Under the facts of that case the participation in a company owning real estate was transferred by a father to his son step by step (i.e. tranche by tranche), while only a minority share of 1% remained with the father that he held under a trusteeship agreement; further a call option was granted to the son. The UFS ruled that only the legal transfer of ownership – and not the economic control over the company – triggers real estate transfer tax and – with reference to the previous decisions – emphasized that a trustee structure regarding a minority share could prevent a unification of shares in one hand. The UFS did not stop at this result, though: rather, it concluded that the used construction was unusual and inappropriate and constituted an abuse of law pursuant Section 22 Federal Fiscal Code (Bundesabgabenordnung – BAO); taxation was the consequence. The Administrative Court (highest tax court in Austria – VwGH) confirmed the ruling of the UFS in its decision dated April 5, 2011 (2010/16/0168).
As a reaction to those decisions and in order to calm the market the Federal Ministry of Finance (BMF) published a decree on June 29, 2011 stating its view on the above: according to the Ministry the VwGH did not change its previous legal practice; economic control of shares would still not fulfill a unification of shares in one hand. A trustee structure – as commonly used by taxpayers – may still ensure that no real estate transfer tax is triggered if economically control is acquired by the trustor, since a mere trusteeship that is permitted for civil law purposes generally does not constitute an abuse of law in the light of Section 22 BAO. However, in particular cases concerning special circumstances an abuse of law may be fulfilled.
Since the view of the Ministry is not legally binding, it cannot be ruled out that the use of trusteeships in connection with the acquisition of shares in a company owning real estate may ensure that no real estate transfer tax is triggered. Literature takes the position that the ruling of the VwGH has to be reduced to the underlying facts of the particular case.
It can only be advised
- not to realize facts and circumstances similar to the above mentioned facts, i.e. no transfer of shares step by step between related parties with a subsequent trusteeship and
- to have a business purpose in place for a trustee structure, i.e. a non-tax driven reason for the structure.
Finding a business purposes for a trustee structure might be difficult; the BMF's decree, however, appears to be a non-application order anyhow.
C. Information from the Salzburger Tax Dialog
At the Salzburger Tax Dialog (published by the BMF on September 19, 2011), inter alia, the following issues regarding international tax law have been discussed.
1. Taxation upon removal (exit taxation) after arrival
A German citizen who has moved from Germany to Austria and holds a major participation in a German company intends to contribute its participation into a German foundation. It was discussed if the contribution of the participation will result in an exit taxation pursuant to Sec 31 (2)(2) Income Tax Act (ICT) before Budget Supplementary Act 2011 (BBG 2011).
The BMF argues that the contribution of the participation into the German foundation would fall within the scope of the exit taxation pursuant Sec 31 (2)(2) ICT before BBG 2011 (now Sec 27 (6)(1)(b) ICT as amended BBG 2011), since facts occurred that result in the loss of the Austrian right of taxation regarding hidden reserves of the participation. The exit taxation only includes the gains realized after the arrival. Even though the German citizen did not leave Austria, he may apply for a tax deferral that would normally only be open to taxpayers leaving the country. A deferral regarding the German taxes does not prevent a deferral granted by the Austrian authorities.
This legal view is decisive if shares are contributed to foreign trusts or foundations.
2. Severance payments and similar considerations, Double Tax Treaty Austria-Germany
A further issue regarding international tax law that was discussed at the Salzburger Tax Dialog is the treatment of severance payments and similar considerations under the Double Tax Treaty with Germany.
The German Federal Fiscal Court (the Bundesfinanzhof – BFH, Germany's highest tax court) regularly considers the state of resident of the recipient entitled to impose tax on the income from severance payments and similar consideration. Thus, the BFH often neglects the causation principle.
According to the causation principle the state of work (Arbeitsausübungsstaat) is entitled to tax the income from employment; it is only decisive whether the respective payments are considered remuneration for the employment performed in the state of work. Thus, the state of work has the right of taxation regarding continued remuneration by the employer upon early termination of the employment relationship, payments relating to a non-completion clause as well as severance payments and vacation compensation even if the respective employee is not (anymore) a resident in the state of work at the decisive point in time.
The BMF stated at the Salzburger Tax Dialog that based on the Common Understanding between Germany and Austria the causation principle shall apply anyway. If a negative qualification conflict occurs (i.e. none of the states involved impose taxes), the severance payments and similar considerations can be taxed by the resident state of the recipient. If a positive qualification conflict occurs (both states impose taxation), double taxation should be prevented by way of a tax exemption in the state of residence.
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.