21.02.2024
Austria: Withholding tax refund for intermediary holding in Cyprus denied
In its decision of 23 March 2023, (Ra 2022/15/0050 in German only) the Austrian Supreme Administrative Court declined the qualification of a Cyprus-based intermediary holding company for a refund of Austrian withholding taxes on dividend payments under the EU Parent Subsidiary Directive. In this decision, the court confirmed its legal opinion expressed in previous decisions.
The appellant was a Cyprus-based company limited by shares (Ltd. 1), which had held shares in an Austrian company (AT SE) since 2007. The sole shareholder of Ltd. 1 was a (group-affiliated) Ltd. 2, also domiciled in Cyprus, whose shares were in turn held by two companies domiciled in the Channel Islands and the British Virgin Islands respectively, three other Cypriot companies and major Russian investors. Austrian withholding tax (WHT) was withheld from the profit distributions of AT SE in the years 2012 to 2017, the refund of which to Ltd. 1 was refused by the competent tax office with the argument that Ltd. 1 was an abusive intermediary.
Lack of economic activities
The competent tax office denied the refund request based on the lack of economic activity of Ltd. 1 and in the absence of economic or other relevant non-tax reasons for the chosen shareholder structure. The appellant argued that the function of Ltd. 1 was to hold and manage investments and to expand the Russian market and necessary tasks to be performed by Ltd. 1 had been outsourced to Ltd. 2 affiliated companies. However, the Fiscal Court qualified this argumentation as pure assertion due to a lack of arm’s-length agreements and the lack of respective expenses in the accounts of Ltd. 1.
Lack of non-tax reasons for the chosen structure
According to the appellant, the economic reason for the chosen structure was the use of Ltd. 1 as a special purpose vehicle (SPV) that bundled shareholdings in the group division ‘construction & development’. Additionally, it was argued that a European holding is essential and market standard for professional investing within the EU. While the Fiscal Court assumed that the Parent Subsidiary Directive was generally applicable, the control through persons who would not be entitled to a withholding tax exemption when holding the shares directly is indicative of abuse, if there is no economic activity and no economic reasons for the chosen structure.
However, there were no own economic activities and the outsourcing of functions to affiliated companies was not proven. Additionally, there was only one further shareholding in Ltd. 1. The argumentation for the need of an EU divisional holding was not comprehensible, as the economic activities of all subsidiaries, except for AT SE, were focused on Russia and Southern Europe. Other reasons, such as the use of English and having a Cyprus holding company as a standard, etc. were not seen as suitable economic or otherwise significant non-tax reasons.
Abusive structures cannot claim WHT relief
The Supreme Administrative Court followed the argumentation of the tax office and the Fiscal Court and found the interposition of the Cypriot companies to be abusive. In connection with the EU Parent-Subsidiary Directive, a prerequisite for the assumption of an abusive arrangement is that the rerouting of dividends via intermediary companies results in unjustified tax savings that could not have been claimed if the shareholder behind it had held the distributing entity directly. In cases where the shareholder behind the foreign intermediary holding would not be entitled to a relief, if he received the dividends directly, the foreign intermediary holding company can therefore only claim the benefits of the EU Parent-Subsidiary Directive if it carries out its own economic activity and if there are relevant non-tax reasons for the interposition.
Nevertheless, it can be concluded from the decision that the substance necessary for the recognition of a foreign company can be created not only by its own economic activity, but also by outsourcing the necessary functions to third parties. The prerequisite, however, is that arm’s-length contractual agreements are in place and implemented and that the relevant activities are actually carried out in accordance with the contract.
Article published in WTS Global ICT Newsletter #1/2024
Changes in international tax law and country-specific tax law developments with respect to cross-border transactions
View publication
Get in contact
If you have any questions about WTS Global or our global services, please get in touch.
We will respond to you as soon as possible.
