Landmark Decision on the Refund of Austrian Withholding Taxes to a non-EU Pension Fund

17/06/20

Landmark Decision on the Refund of Austrian Withholding Taxes to a non-EU Pension Fund

The Austrian Federal Fiscal Court has decided that the non-reimbursement of Austrian withholding taxes on dividends to a non-EU pension fund constitutes an infringement of the principle of the free movement of capital (BFG 21. 11. 2019, RV/7102891/2012).

Background

Austrian dividend income is generally subject to 27.5% withholding tax to be withheld by the Austrian distributing corporation. If dividends are paid to foreign corporate bodies, the dividends are either exempt from Austrian withholding taxes on the basis of the EU Parent-Subsidiary Directive (relief-at-source or refund), or the Austrian withholding taxes are fully refunded if the recipient qualifies as an EU pension fund comparable to an Austrian pension fund.

If neither the EU Parent-Subsidiary Directive nor the EU pension fund exemption is applicable, Austrian withholding taxes are refundable based on the relevant Double Tax Treaty (DTT) that Austria has concluded with the recipient’s state of residence. In addition, pursuant to Section 21 (1) 1a of the Austrian Corporate Income Tax Act (ACITA), withholding taxes on dividend income, which are not recoverable based on a DTT, are refunded on application if both the following conditions are met:

  • The Austrian withholding taxes cannot be credited on the recipient’s tax in the state of residence on the basis of a DTT (e.g. because the recipient’s income is tax-exempt).
  • The recipient is a corporate body resident in an EU/EEA member state.

In the present case, a Canadian pension fund owned by the state of Canada initially applied for the refund of Austrian withholding taxes on the basis of Article 10 of the DTT between Austria and Canada. This application was granted by the tax office.

As the Canadian pension fund is tax-exempt in Canada, the pension fund filed an additional claim for refund of the remaining 15% withholding taxes on dividends, which were not refundable pursuant to the DTT. In the application, which was rejected by the Austrian tax office, the pension fund referred to the principle of free movement of capital pursuant to Article 63 of the Treaty on the Functioning of the European Union (TFEU) and argued that the exclusion of dividend payments to third country corporate bodies in Section 21 (1) 1a of the ACITA is incompatible with EU law.

Decision of the Austrian Federal Fiscal Court

The Austrian Federal Fiscal Court supported the pension fund’s arguments and stated the following in the judgment:

  • The Austrian Federal Fiscal Court argued that Article 63 of the TFEU prohibits all restrictions on the free movement of capital between EU member states and between EU member states and third countries.
  • Therefore, since dividend payments to domestic corporate bodies are tax-exempt, Austrian dividends paid to corporate bodies resident in third countries must also be exempt from Austrian withholding taxes, if the withholding taxes are not creditable in the recipient’s state of residence and if the relevant DTT contains a comprehensive exchange of information clause.
  • The ‘standstill’ clause of Article 64 TFEU is not applicable since a participation below 10% is not considered a ‘direct investment’ (i.e. no participation in the management of the company or in its control is given).

An official appeal was brought against this decision before the Supreme Administrative Court.

Our recommendation

The chances are high that the Supreme Administrative Court will also consider the principle of the free movement of capital to have been infringed and will thus decide in favor of the Canadian pension fund. It is therefore recommended that corporate bodies (pension funds, insurance companies, financial institutions, etc.) resident in non-EU/EEA countries holding small shares in Austrian corporations file such claims within the limitation period of five years.

Author: Johannes Edlbacher & Birgit Schneider

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Tax Partners

Monika Berndl

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Gerald Dipplinger

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Marianna Dozsa

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Peter Draxler

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Johannes Edlbacher

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Peter Hadl

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