In September 2023, the Austrian Supreme Administrative Court (VwGH) filed a preliminary ruling request with the European Court of Justice (“ECJ”) concerning the Austrian investment funds legislation. The case concerns a US trust requesting a full withholding tax refund. The decision is the continuation of a feud before Austrian courts that has been going on for some years now.
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-fund 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. 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:
1. 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.
2. If yes: Is there an objectively comparable situation between:
a) an Austrian corporation whose assets are invested in accordance with the principle 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?
3. 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?
Conclusions
Based on Austrian investment fund law, foreign funds are regularly treated as tax transparent hence their income is attributed to their shareholders, allowing the Austrian Tax Authorities to refuse WHT claims filed by such funds. While the individual fund investor can only reduce the Austrian WHT to 15% based on most treaties, foreign corporations have the chance to reduce the WHT to zero. This reduction to 0% WHT is available if the foreign corporation is situated in the EU/EEA or in a country with comprehensive administrative assistance and if the Austrian WHT cannot be credited in the country of residence. This differentiation is especially crucial in the case at hand, as the US tax burden of the fund can be reduced to zero, hence the Austrian WHT of 15% would constitute an additional burden. Depending on the ECJ’s response, the outcome and consistent execution could lead to a milestone in the treatment of foreign funds and comparable WHT cases, as it might offer the possibility of claiming a full refund of the Austrian WHT on dividends. We will continue to monitor the ECJ’s answer and keep you informed.
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ICON Wirtschaftstreuhand GmbH
