WITHHOLDING TAX | ECJ ruling request on treatment of foreign funds

The appellant is a Delaware-based “trust” made up of seven “series” (sub-funds), each of which was treated as a taxable entity under US law (hereinafter referred to as the “US trust”). The US Trust could claim distributions as a business expense under US tax law, provided at least 90% of taxable income (excluding realized appreciation) was distributed to investors, effectively reducing US federal tax to zero. Hence, foreign withholding tax (WHT) could not be credited in the US. In 2013 and 2014, the US trust received dividends from two listed Austrian stock corporations. In accordance with the treaty between Austria and the US and based on a refund request for its shareholders filed by the appellant, the Austrian tax office reduced the Austrian WHT to 15%. Additionally, the appellant applied for a full refund of the remaining WHT. This claim was based on sec. 21 para. 1 subpara. 1a Austrian CIT law, which allows a full recovery of WHT to corporations resident in an EU/EEA Member State or in certain third countries, if the WHT cannot be credited in the country of residence. 

Austrian investment fund legislation and the practice of the Austrian Tax Authorities (ATA) regularly treat foreign investment funds as tax transparent, particularly based on special legislation in sec. 188 investment fund law (“InvFG” - please note the law has been amended since the relevant years for the case at hand). The prevailing opinion among the ATA is that claims for WHT refunds must be filed on sub-funds level. Moreover, tax transparency of the trust in question would mean that the WHT reduction for individual fund investors would be limited to the treaty rate, as sec. 21 para. 1 subpara. 1a Austrian CIT law is not accessible to them and there is no comparable rule in the income tax act. 

In its previous decision in this matter, the Supreme Administrative Court referred the case back to the lower Austrian court, in order to clarify, whether the US trust was entitled to file a WHT refund request (see our previous newsletter article on this). The lower court found that the US trust was comparable to an Austrian corporation and attributed the dividend income to the trust, hence ruled in favor of the US trust and its WHT reclaim. According to the court, sec. 188 InvFG prevents this attribution of income, which is why there is a restriction on the free movement of capital for which there is no justification. However, the ATA filed a complaint with the Austrian Supreme Administrative Court, who has now decided to file a preliminary ruling request with the ECJ. The following questions have been raised to the European court: 

• Does Sec 188 InvFG constitute a restriction on the free movement of capital? 

The question focuses on the fact that an Austrian UCITS may only operate in the legal form of a special fund (transparent) but does not allow a UCITS to operate as a corporation. In contrast, the foreign US fund at issue does in fact correspond to a UCITS and operates in the form of a corporation from an Austrian perspective.

• If yes: Is there an objectively comparable situation between 

  • ​​​​​​​(a) an Austrian corporation whose assets are invested in accordance with the principles of risk spreading but which is not considered a UCITS, as its monies are not raised from the public, and 

  • (b) a foreign investment fund company which would be considered a UCITS under Austrian principles and who raised funds from the public, and who is permitted to operate as a corporation in Austria?

• If yes:  Is there any justification for the restriction of the free movement of capital, considering the purpose of Austrian tax provision, i.e. to ensure that neither a domestic nor a foreign fund should provide any tax shielding effect, but should focus on the taxation of the actual beneficial owners of the funds according to their actual situation?