Interim tax in connection with non-resident beneficiaries
Introduction
The European Court of Justice (ECJ) recently ruled that the system of interim taxation for Austrian private foundations does not comply with EU law.(1)
A special feature of private foundations is the so-called ‘interim tax’ – a type of corporate income tax. Pursuant to Section 13(3) of the Corporate Income Tax Act, certain categories of income (eg, interest income and capital gains) earned by a private foundation are subject to this 25% tax. The tax base for interim tax is reduced by any gifts made to beneficiaries in the same assessment period on which the 25% withholding tax was deducted, paid and not reclaimed on the basis of a double taxation convention. Any paid interim tax that has not yet been refunded will be returned at the latest when the private foundation is dissolved (hence the name).
Facts
In the case at hand, a private foundation received income that was subject to the interim tax. The private foundation simultaneously made gifts to a beneficiary resident in Belgium and another beneficiary resident in Germany. It deducted the 25% withholding tax from both transactions. Both beneficiaries applied for and were granted a refund for this withholding tax on the basis of the double taxation conventions in force between Austria and their respective countries of residence. On the basis of the law, the Austrian tax authorities denied the deduction of the gifts from the tax base of the interim tax.
The private foundation brought the case before the Supreme Administrative Court, claiming a restriction of free movement of capital under Article 56 of a EC Treaty. The court in turn sought the ECJ’s guidance on whether a foundation’s right to deduct gifts made from its taxable income is contigent on the beneficiary being subject to Austrian withholding tax.
Decision
The ECJ held that a foundation’s gifts to its beneficiaries fall under the concept of ‘movement of capital’ within the meaning of Article 56(1) of the EC Treaty. The ECJ further held that a system that makes a private foundation’s right to deduct gifts from its taxable basis contingent on whether the beneficiary is subject to Austrian withholding tax, and which excludes such deductions in the case of non-resident beneficiaries that are exempt from Austrian withholding tax under a double taxation convention, impairs the free movement of capital. The reason for this is that the higher interim tax could result in a cash-flow disadvantage which would not be incurred in a purely domestic situation. The private foundation would have greater financial means at its disposal when making a gift to an Austrian beneficiary than when making a gift to a non-resident beneficiary. Thus, a private foundation would be discouraged from making gifts to beneficiaries outside Austria. In addition, from the founder’s standpoint, it would be less advantageous to set up a private foundation with beneficiaries residing in another member state.
This judgment will help to make Austrian private foundations with non-resident beneficiaries more attractive from a tax perspective.
For further information on this topic please contact Cynthia Pfister at Wolf Theiss by telephone (+44 43 1 515 10) or email (cynthia.pfister@wolftheiss.com). The Wolf Theiss website can be accessed at www.wolftheiss.com.
