The CJEU has confirmed that Austria is permitted to withhold tax refunds from foreign investment funds, provided that there is no discrimination on objective grounds and domestic funds are treated equally.
Withholding taxes are a key consideration for cross-border investors, particularly in the investment funds industry. As funds typically operate across jurisdictions, the existence of a withholding tax, as well as the conditions under which it may be reduced or refunded, can materially affect the net returns of a fund and, by extension, its investors. Moreover, withholding tax rules that hinge on the legal form or tax transparency of the fund, rather than on its economic function, can also create uncertainty and distort investment decisions. In this context, case law from the Court of Justice of the European Union (CJEU) plays a crucial role in delineating the boundaries of between resident and non-resident investors under EU law. The recent Franklin decision (C-602/23) is the latest chapter in this evolving area.
Overview of decision
On 30 April 2025, the Court ruled in favour of the Austrian tax authorities and disallowed a tax refund on the dividend withholding tax to a non-resident American investment company.
Austrian tax legislation levies 25% dividend withholding tax on income derived from Austrian stocks. In accordance with the prevailing legislation, a reimbursement of the said withholding tax is permissible for taxpayers who are domiciled within the jurisdiction of the European Union or the European Economic Area. Of particular significance is the fact that the refund is applicable exclusively in instances where the income can be attributed directly to the taxpayer (for instance, in the context of limited liability companies). Conversely, it does not pertain to a tax-transparent entities. In accordance with the provisions stipulated within Austrian tax law, it is deemed obligatory for all investment funds to be transparent, a stipulation that is applicable to foreign funds irrespective of their respective legal form.
Facts of the case
Franklin Mutual Series Funds (Franklin), an investment company (a "series") based in the United States, sought a refund of the withholding tax. The Austrian tax authority had initially reduced the tax rate from 25% to 15% based on the Double Taxation (Avoidance) Treaty, but refused to refund the remaining balance (~€370,000), arguing that Franklin was not resident in another EU or EEA jurisdiction.
The Austrian tax authorities then revised their position, asserting that, given the treatment of all investment funds as tax transparent in Austria, Franklin did not meet the eligibility criteria for the tax refund, which is exclusively available to entities such as limited liability companies. According to Austrian legislation, investment funds are not and cannot be categorised as such. Furthermore, the unitholders of Franklin would be allowed to submit claims for tax refunds themselves. However, this would result in the burden being transferred to retail investors, who would be required to submit claims directly to the relevant Austrian tax authorities. Franklin's argument was that, under US tax law, it is deemed an opaque entity for tax purposes by default. As a result, Franklin contended that it should be compared to a domestic Austrian limited liability company, which is permitted to apply for a tax refund on the withholding tax in Austria.
The initial challenge was presented to the Federal Finance Court (ref: RV/7103986/2015), which dismissed it. The court determined that Franklin did not fulfil the stipulated criteria for a refund under Austrian tax legislation, as the income was, under Austrian tax law, attributed to the unitholders who were the actual taxpayers. Moreover, the court determined that there was no discrimination under EU law, as the tax treatment of the complainant was comparable to that of a domestic investment fund, not a domestic corporation. The dismissal was contested in the Supreme Administrative Court (ref: RO/2018/13/0003), which stayed the decision, instructing the Federal Finance Court to undertake a special comparison test. Ultimately, Franklin prevailed on the grounds that it had to be treated as a tax opaque entity under US law, whilst in Austria, it was discriminatorily treated as tax transparent.
The Austrian tax authorities reopened the case for legal revision with the Supreme Administrative Court, which in turn referred the case to the CJEU.
Court decision
The CJEU contended that treating Franklin as a domestic investment fund for tax purposes would only be discriminatory if Franklin was not comparable to such funds but was comparable to domestic companies instead.
The CJEU observed that only the differences deemed relevant had to be examined, in consideration of the purpose and context of Austrian tax law. The purpose of the Austrian deemed transparency regime is to ensure that offshore investment funds cannot utilise tax shielding effects for the benefit of their unit holders.
It was determined that Franklin exhibited the same characteristics as an Austrian investment fund (i.e. pooling of capital, management of funds under a specified risk policy, scrutinization of the effectiveness of supervision and control, being subject to similar regulatory oversight and drawing prospectus as well as periodic reporting to the investors and the regulatory authorities), with the sole exception of possessing a separate legal personality. The CJEU observed that the distinction in legal form was not determinative and had no bearing on the economic analysis. Franklin's activities corresponded in all material matters to a domestic investment fund and thus to a UCIT within the meaning of the UCITS Directive. Furthermore, while Franklin was by default tax opaque in the US, it had the option of becoming quasi tax transparent if it distributed at least 90% of its profits to its unitholders (which it crucially did during the years concerned).
The CJEU ruled that the Austrian legislation did not constitute a restriction on the free movement of capital, on the condition that the income received by the non-resident entity is attributed to its unit-holders and is taxed in its state of residence, rather than at the level of the non-resident entity.
The decision underscores that differences in legal form (opaque vs. transparent) are not, on their own, decisive under EU law. What appears to matter is whether the foreign entity is objectively comparable to a domestic one in light of the purpose and structure of the relevant tax rules.
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.
