The Austrian Ministry of Finance has recently published information on tax aspects in connection with Hong Kong trusts (EAS 3396).
The Ministry stated that in order to assess Austrian tax consequences in connection with trusts, in a first step it has to be determined by way of a comparability test how a trust is to be qualified for Austrian income tax purposes. While a case by case analysis is always necessary, a trust is generally to be qualified as "assets serving a purpose without having legal capacity" (Zweckvermögen). As a consequence, a foreign trust can generally be seen as being tax resident in Austria if:
- its income is not attributable to a different taxpayer, such as a settlor or a beneficiary (in that respect the general Austrian rules on attribution of income for tax purposes apply); and
- it has an Austrian place of management.
As regards the place of management of the trust, the decisive question is where the essential decisions regarding the management of the trust are factually passed. The fact that one of several members of the board of trustees is an Austrian tax resident does not result in an Austrian place of management of the trust, if the board consists of several members, the board's decisions are effected by simple majority and it does not render its decisions in Austria. Consequently, such trust will only be subject to Austrian corporate income tax on certain types of Austrian source income.
For purposes of the double tax treaty concluded between Austria and Hong Kong ("DTT AT/HK"), a trust set up or registered in Hong Kong qualifies as a Hong Kong tax resident if its place of effective management is not in Austria.
Further, the Ministry commented on the qualification of income received by an Austrian tax resident individual from his or her function as a member of the board of trustees: Art. 15 of the DTT AT/HK on directors' fees would only be applicable by way of analogy if the board member's functions were restricted to mere supervisory functions. In that case, Hong Kong would have the right to tax, with Austria generally having to exempt such income from Austrian taxation, but subject to progression. If, however, fees were paid in order to remunerate the Austrian tax resident individual for functions comparable to those of a managing director, art. 15 of the DTT AT/HK would not apply.
Finally, the Ministry stated that distributions from a Hong Kong trust received by an Austrian tax resident beneficiary are taxable as recurring income pursuant to sec. 29(1) of the Austrian Income Tax Act at the individual's progressive income tax rate. Such income does not qualify as other income pursuant to art. 20 of the DTT AT/HK, but rather as dividends pursuant to art. 10 of the DTT AT/HK. This is due to the fact that the DTT AT/HK does not refer to "corporate rights" in its definition of dividends. Thus, Austria may tax distributions, with Hong Kong's taxation right being restricted to 10%; however, Austria has to credit such Hong Kong source tax.
Even though not stated in the Ministry's information, for the sake of completeness the following should be noted: A one-off distribution, i.e., a distribution not qualifying as "recurring income", should not be taxable at all in Austria.
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.