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WITHHOLDING TAX | recent developments in regard to dividend taxation

The European Court of Justice’s recent landmark ruling in the AllianzGI-Fonds AEVN case (C-545/19) is expected to have a significant impact on Member States’ tax rules regarding dividend withholding tax (“WHT”). In our recent newsflash of the WTS Global European Tax Law Center (“ETLC”) we have therefore put together an overview of the status and evolution of the tax treatment of dividends in Austria, Belgium, Italy, Spain and Sweden. In the following you will find the current status and developments in the Austrian legislation and judicature.

On 17 March 2022, the European Court of Justice (“ECJ”) delivered a preliminary reference ruling on AllianzGI-Fonds AEVN v Autoridade Tributária e Aduaneira (C-545/19), in which it affirmed that the free movement of capital (Article 63 of the Treaty on the Functioning of the European Union (“Article 63 TFEU”)) “must be interpreted as opposing the legislation of a Member State under which dividends distributed by resident companies to a non-resident collective investment vehicle (“CIV”) are subject to withholding tax, whereas dividends distributed to a resident CIV are exempt from such withholding”.

The ECJ’s reasoning will have considerable influence on the Member States’ national tax rules. Our recent WTS Global ETLC newsflash provides a detailed overview of the case. The ECJ ruling’s key implications are:

  • the transparent nature of foreign funds is not important if the relevant national provisions do not take into consideration the position of the ultimate investors;
  • discriminatory provisions can only be justified when the purpose of such provisions is to mitigate against tax abuses and/or eliminate economic double taxation; and
  • non-EU CIVs should also be allowed to recover the WHT paid, according to the principle of free movement of capital (upon which the ECJ based its ruling).

Current Austrian legislation on dividend WHT

​​​​​​​Austria generally levies a dividend WHT of 27.5%, which may be reduced to the prevailing corporate income tax rate of 25% if the recipient is subject to corporate income tax (for example, legal entities). The dividend WHT can be reduced at source under the applicable double taxation agreements (“DTAs”) in accordance with the formal requirements laid down in the DBA-Entlastungsverordnung. A recipient seeking to reduce the dividend WHT will have to provide a certificate of residence issued on Austrian forms ZS-QU1 or ZS-QU2 (“COR”). Additionally, legal entities must also satisfy the relevant substance requirements. The DBA-Entlastungsverordnung limits the dividend WHT exemption at source in certain cases – for example, foreign foundations, trusts and investment funds do not qualify for dividend WHT exemption at source.

Implementation of the EU Parent Subsidiary Directive

The EU Parent Subsidiary Directive has been transposed into Austrian tax rules. A foreign entity covered by this Directive is exempt from dividend WHT if it has a (direct or indirect) shareholding of at least 10% and has held the shares for a period of at least one year. Additionally, the pre-requisites of providing a COR and satisfying the relevant substance requirements similarly apply. An Austrian entity holding at least 10% of the shares is also exempt from dividend WHT, although there is no requirement for the shares to be held for a period of at least one year. Relevantly, the grant of a dividend WHT exemption to a foreign entity is subject to Austrian anti-avoidance rules.

The refund of the total Austrian WHT and the Austrian tax reform

Austrian corporate income tax law includes a special provision that allows a foreign entity to apply for a refund of the total Austrian WHT – including the share of WHT that Austria is entitled to tax under the relevant DTAs – if the foreign entity is unable to credit the Austrian WHT in its country of residence (for example, because the dividend income is exempt). This special provision is currently limited to EU- or EEA-resident corporate taxpayers.

However, the Austrian Supreme Administrative Court (VwGH 11.9.2020, Ra 2020/13/0006) found that such a limitation conflicts with the principle of free movement of capital if the foreign recipient is a portfolio investor (with a shareholding of less than 10%) as the principle also applies to a non-EU and non-EEA portfolio investor. Therefore, the recently issued 2022 draft of the Austrian tax reform provides for an amendment to extend this special provision to non-EU and non-EEA portfolio investors where extensive administrative assistance in tax matters applies between Austria and the country of residence. The limitation to such countries seems to be compatible with ECJ jurisprudence (see X-GmbH v Finanzamt Stuttgart Körperschaften (C-135/17), Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz (C-436/08) and Österreichische Salinen AG v Finanzamt Linz (C-437/08)).

Despite the above, doubts remain about whether the special provisions comply with EU law in instances where the Austrian investment fund is a look-through entity and the individual shareholder is not subject to tax.

Consistency with EU law

​​​​​​​In its decision of 13 January 2021, the Austrian Supreme Administrative Court (VwGH 13.01.2021, Ro 2018/13/0003) dealt with the question of whether a foreign trust is eligible for a WHT refund in Austria (please refer to our newsletter for details). The decision held that the Austrian investment fund taxation regime (see section 188 of the Investment Fund Law) may adopt a look-through approach for foreign funds. In this regard, some concerns have been raised as to whether the Austrian investment fund taxation regime is fully compatible with EU law.

​​​​​​​The free movement of capital will take the route of continuing to be a driving force for amendments to national legislations regarding dividend taxation. Additionally, national legislators are influenced by the ECJ’s jurisprudence to align their tax legislation to create a consistent tax-legal environment for the common capital market. However, there are still differences in national legislation that can undermine the free movement of capital.

Therefore, the EU Commission is progressing the initiative on the “New EU system for the avoidance of double taxation and prevention of tax abuse in the field of withholding taxes”, which aims to introduce a common EU-wide system for WHT on dividends and interest payments, and will also include a system for tax authorities to exchange information and cooperate with each other. A proposal for a directive is scheduled for later in 2022. For details in this regard see our newsflash from December 2021.

​​​​​​​In case of any questions to this topic please do not hesitate to contact our experts of the Service Line “International Tax”