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WITHHOLDING TAX | Supreme court on income attribution to foreign trusts

In its decision of 13 January 2021 (Ro 2018/13/0003), the Austrian Supreme Administrative Court decides the question whether a US Trust is eligible for withholding tax refund on Austrian profit distributions. The court also deals with the question whether a different treatment of foreign entities and Austrian corporations according to the investment fund law is in accordance with the free movement of capital (art 63 TFEU).

The appellant was 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. While the tax office reduced the Austrian capital gains tax to 15% (in accordance with the DTA between the US and Austria), the appellant applied for a full refund of the WHT. This request is based on a provision in Austrian corporate tax law that allows EU and EEA resident entities a full refund when the WHT cannot be credited in the country of residence. According to a decision of the Supreme Administrative Court (11 September 2020, Ra 2020/13/006) this provision can be applied by applicants from third countries due to the free movement of capital. 

The Austrian Fiscal Court (lower court) dismissed the appeal against the tax office’s rejection notice because the US trust must be qualified as a foreign investment fund within the meaning of sec. 188 investment fund law and therefore the dividends are attributable to the shareholders, even if the US trust or the “series” are considered a taxpayer in the US. Thus, according to the Fiscal Court, the US trust could not apply for a refund.

According to the Austrian Supreme Administrative Court, three steps must be taken to determine whether a foreign entity is entitled to file a WHT refund request:

  • Comparability test – the first step is the assessment of whether the US trust is comparable to an Austrian corporation. If it is not comparable, the owners of the US trust would be the recipient of the respective income and hence would have to file respective WHT refund requests.
  • Attribution of income – in case the US trust is comparable to an Austrian corporation, the question is whether the relevant income is attributable to the US trust or the natural persons (investors) owning the trust. In case the US trust is not comparable, and the income is also not attributable to the natural persons owning the US trust, the US trust might qualify as special purpose asset (Zweckvermögen).
  • Applicability of special provisions of the Austrian investment funds law (sec. 188 investment fund law) – if the US trust is comparable and the income can generally be attributed to it or if the trust is a special purpose asset, it must be assessed whether sec. 188 investment fund law would apply. This would still lead to the transparency of the US trust according to sec. 186 investment fund law; hence the owners of the trust would have to file a WHT refund in Austria.

The Supreme Administrative Court has referred the case back to the Fiscal Court to perform those tests. This decision is still pending. According to the Austrian Supreme Administrative Court, the regulation in sec . 188 investment fund law has been compliant with the free movement of capital since it was amended in 2014. For 2013, it is up to the Fiscal Court to assess the compliance with the free movement of capital.

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

This article has also been published in the WTS Global Financial Services Newsletter 24 - 2022