WITHHOLDING TAX | ECJ on WHT refund to foreign CIVs

• Under Austrian law, foreign domestic and investment vehicles are treated as disregarded entities, irrespective of whether they have legal personality or not.
• However, for a long time, Austrian law applied a double standard: While domestic funds where only taxed transparently under very limited circumstances (e.g. collection of public funds), foreign entities could be qualified as funds solely on the basis that the vehicle invested “in accordance with the principles of risk diversification”. Consequently, the fiscal authorities could pierce the corporate veil of foreign entities in a discriminatory manner. Thus, many foreign corporate taxpayers could not claim a special withholding tax refund granted to corporate taxpayers under domestic law.
• The ECJ now ruled that – in a certain case of a US trust – § 188 of the Austrian Investment Fund Act did NOT violate the freedom of capital movement, as the foreign entity was comparable to an Austrian UCITS (“Undertakings for Collective Investment in Transferable Securities”) that would be taxed transparently in Austria anyways. Consequently, the ECJ confirmed the Austrian authorities in denying the withholding tax refund on Austrian portfolio dividends received by the US trust.
• However, despite the ECJ’s confirmation there are still doubts as to whether the current wording of § 188 of the Austrian Investment Fund Act is compatible with the fundamental freedoms. The rule still discriminates and enables the authorities to pierce the corporate veil of a foreign entity denying WHT refunds even if it could not do so if the same entity was a resident corporate taxpayer. In the case at hand, the ECJ solely sided with the authorities, because the foreign entity would have been qualified as investment fund under Austrian laws anyways.

In the current legal situation, this question has become superfluous anyway, as § 188 of the Austrian Investment Fund Act has been amended to the effect that foreign and domestic UCITS and AIFs are covered by the transparency fiction in the same way. However, it remains questionable whether § 188(1)(3) of the Austrian Investment Fund Act is in line with EU principles. According to this rule, any foreign undertaking that invests in accordance with the principles of risk diversification is subject to the transparency fiction if the undertaking is not subject to a tax comparable to Austrian corporation tax; this may be, for example, a foreign cash pooling company that invests in securities to finance operational activities (and can therefore be neither a UCITS nor an AIF). In this regard the tax authorities can disregard foreign entities, which is not possible for comparable domestic entities.