In a landmark decision, the Federal Fiscal Court of Austria (BFG 21. 11. 2019, RV/7102891/2012) has granted an application for a full refund of withholding tax on dividends paid to a Canadian pension fund.
The applicant, a Canadian pension fund (the Fund), received dividends from shares in an Austrian stock corporation. A 25% withholding tax was withheld in Austria for these dividends, whereby 10% could be recovered on the basis of the Austria-Canada (AT-CAN) Double Tax Treaty. The Fund tried to recover the remaining 15% on the basis of the domestic tax rule (in Section 21/1/1a Corporate Income Tax Act, CITA), which provides for a full recovery of Austrian withholding taxes when dividends are paid to EU corporations, if the Austrian withholding taxes cannot be credited against foreign corporate taxes. In the case at hand, the remaining 15% could not be credited against Canadian tax as the Fund was a Canadian crown corporation and tax-exempt in Canada. However, the application of Section 21/1/1a CITA was denied on the basis that the Fund was a resident in Canada and not in the EU.
Decision of the Federal Fiscal Court
At the Federal Fiscal Court, the Fund objected to the unequal treatment between dividends paid to domestic entities and those paid to non-residents, and the Fund tried to recover the remaining 15% on the basis of non-discrimination principles under the EU's freedom of movement of capital, which also applies to non-EU entities. The Fund argued that the mere applicability of section 21/1/1a CITA to EU corporations leads to discrimination of non-EU entities as it is likely to prevent non-resident pension funds from investing in Austria.
The Fund further argued that this discrimination could not be justified as there is no comparable tax crediting possibility for a tax-exempt Canadian fund. The Fund also declined the application of the Stand-Still clause of Article 64 TFEU for direct investments as the participation in a public limited company is not considered a direct investment unless the shares give the holder a management or control option. The Fund's participation of under 10% cannot be seen as such a direct investment.
The Federal Fiscal Court agreed with the Fund's argument and affirmed that the national rule, Section 21/1/1a CITA, is superseded by the EU freedom of movement of capital, and for this reason the request by the Fund for a full repayment of the remaining 15% which is out of scope of the AT-CAN Double Tax Treaty must be granted.
An official appeal was brought against this ruling with the Supreme Administrative Court. Although that is the case, the decision by the Federal Fiscal Court is expected to be important for non-EU entities receiving dividends from Austria. As the Supreme Administrative Court usually interprets domestic Austrian law in line with EU principles, it is likely that a refund request will be granted, not only for the recovery amount of 10% according to the Double Tax Treaty but for the whole 25% of Austrian withholding tax on dividends.
Further, it is not only pension funds that should review their withholding tax positions in respect of dividends from Austrian companies. Insurance companies, banks and other corporate groups could potentially also file claims for a full refund of the Austrian withholding taxes on dividends.
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