The Ministry of Finance has published an EAS ruling dealing with the taxation of income received by an Austrian beneficiary from a Hungarian trust.

When assessing the Austrian tax consequences of a Hungarian trust distributing income to Austrian beneficiaries it has to be determined whether the trust is transparent or non-transparent for Austrian tax purposes. A trust is essentially non-transparent if its assets and income are attributable for tax purposes to itself rather than to other persons (the latter mainly depending on whether the founder/beneficiaries have a certain level of influence on the trust). In case of a non-transparent trust, only the distributions from the trust are taxable in Austria, whereas the income of the trust derived from the various foreign income sources is not taxable.

In the case at hand, the Ministry of Finance held that the concrete Hungarian trust was non-transparent. Therefore, any withholding taxes levied on the income of the trust in Hungary do not qualify as taxes on the distributions to the Austrian beneficiaries (18 July 2017, EAS 3382). As a consequence, the beneficiary cannot – based on the double taxation treaty between Austria and Hungary ("DTT Hungary" ) – claim a tax credit in Austria for the Hungarian tax.

If Hungary, in addition, taxed the distributions from the trust to the Austrian beneficiaries, again no tax credit would be granted. The Ministry of Finance takes the view that such distributions are not covered by art. 10 of the DTT Hungary (dealing with dividends) as the beneficiaries of a trust do not hold company shares in the meaning of art. 10(3) of the DTT Hungary. Consequently, from an Austrian perspective, art. 20 of the DTT Hungary (other income) would be applicable which allocates the exclusive taxation right to Austria. The only possibility for the beneficiaries to get a tax credit for the distribution's source tax already paid in Hungary (and to avoid double taxation) would be to initiate a mutual agreement procedure according to art. 24 of the DTT Hungary.

Since art. 10(3) of the DTT Hungary follows art. 10(3) of the OECD Model Convention ("OECD MC" ) the relevance of the EAS ruling is not limited to the interpretation of the DTT Hungary.

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.