1Austria: CJEU Recent Cases - F.E. Familienprivatstiftung Eisenstadt and Finanzamt Linz
Claus Staringer
I. Overview
II. Familienprivatstiftung Eisenstadt (C-589/13)
III. Finanzamt Linz (C-66/14)
I. 2Overview
There are two reportable cases from Austria on direct taxes, both already decided by the CJEU. The two cases are (C-589/13) 1 and (C-66/14) 2 . The "Court's schedule has been such that both of these cases were reported as pending at last year's conference (and in the subsequent book). 3 In the intervening period, the rulings have now been published in both cases so that they can now be reported as recent cases.
In last year's contribution, a detailed description of the facts of both cases was given, and an analysis of their legal issues is already available there. Therefore, for the avoidance of unnecessary duplication, the following contribution will limit itself to a description of the facts and the legal issues of the cases only to the extent necessary for the reader to get a simple overview of the cases by reading the present contribution. The main focus, however, will be on key aspects of the judgments of the CJEU now available for and .
II. Familienprivatstiftung Eisenstadt (C-589/13)
As described in detail last year, this case is about the "interim tax" regime for Austrian private foundations (). In a nutshell, this regime works as follows: In terms of the initial underlying intention of the legislator, private foundations were exempt from corporate tax on their investment income and capital gains. Conceptually, such income was therefore not to be taxed at the level of the foundation, however it was prescribed that a tax would be levied upon distribution by the foundation to its beneficiaries (this tax was levied by way of a withholding tax in the amount of, then 25 %, now 27.5 %). The result of this initial concept was a deferral effect for the tax burden on the foundation's income, as this burden was deferred until the point when distributions to beneficiaries were actually made (the effect of which could be rather significant if no or only small distributions were made by the foundation). Over the years, however, this regime was amended with the purpose of, firstly, mitigating, and secondly, abolishing the deferral effect by levying corporate income tax on the foundation's investment income and capital gains (the rate of such corporate income tax being 12.5 % in the years in dispute, today it is 25 %). This corporate income tax on foundations is colloquially known as an "interim tax", because there is a refund of the tax to the 3foundation if and to the extent it makes subsequent distributions to its beneficiaries. If the foundation did not distribute its full income to beneficiaries, the residual (i.e. not yet refunded) interim tax was ultimately refunded in full to the foundation upon its dissolution. In other words, the foundation's corporate income tax was, in the long run, of an "interim" nature only as the foundation was guaranteed to get a refund of the tax at the latest upon its dissolution.
The issue in the case was, however, that there no such refund of interim tax was granted at the time of distribution to beneficiaries, if the beneficiaries were resident in a foreign country that had concluded a tax treaty with Austria limiting (or eliminating in full) Austria's right to tax the distributions. In such a case of non-resident and treaty protected beneficiaries, the foundation's interim tax was refunded (although still in full) no earlier than upon dissolution of the foundation. Obviously, this could have a significant effect on the foundation's tax and liquidity position if there was no plan to dissolve the foundation in the near future. The issue arose frequently. Looking at Austria's tax treaty network, most tax treaties concluded by Austria do provide for such limitation or even elimination of Austria's right to tax the distribution: Typically distributions of foundations fall under Article 21 OECD MC-type of treaty rules with no right to levy a tax allocated to the source state. Some of Austria's treaties treat distributions of foundations as dividends (Article 10 OECD MC), thereby giving Austria a limited right to a withholding tax on the distribution. As a result, this had led to discrimination of foundations and their right for an immediate refund of interim tax in many cases where there were non-resident beneficiaries, i.e. in every case where there were beneficiaries with tax treaty protected status. In other words, the foundation was taxed essentially only because it had a beneficiary who was resident in a tax treaty country.
In its judgment, the CJEU was very clear in establishing that such discrimination was an infringement of the free movement of capital. In coming to this conclusion, the analysis of the Court was along the following lines: the Court firstly established what the protected capital movement was in the case before it. The Court held that, although the distribution was not directly taxed (which is certainly right as the case was not about a tax on distributions, but on the refusal of a refund to the foundation), the tax on the foundation's income still depended on the distributions (and the beneficiaries' treaty status). In this situation, the Court found two reasons to apply the free movement of capital: First, the distribution was a protected "transfer of capital" (equivalent to a donation). Second, the interim tax refund regime at issue could prevent the foundation from making distributions to non-resident beneficiaries. Against the background of these two reasons, the Court held that the "present situation" was protected under the free movement of capital. 4
4In its next step, the Court provided its analysis on comparability. This was important in the case, as the Austrian government took the position in the proceedings that distributions to resident and non-resident beneficiaries do not amount to the same situation. The government's argument was that the underlying concept in Austrian law would require that the foundation's income is taxed in Austria "somewhere" (if not in the hands of the beneficiary, then in the hands of the foundation). If there is, as a matter of treaty application, no tax levied by Austria on the distribution, this concept would require Austria to levy a "substitute" tax on the foundation (through not granting the refund of the interim tax). There is an obvious similarity between the Austrian government's position and the argument that was used by the CJEU in the Case some years ago (C-374/04). 5 In that case, the Court held that the situations of a resident or non-resident shareholder of a UK resident company receiving a credit or refund of the UK Advance Corporation Tax (ACT) were not comparable. 6 Accordingly, in there was no discrimination issue although non-resident shareholders were refused a refund of ACT purely because of their non-resident status. The key point made by the CJEU in was the argument that the source state would "otherwise forego the taxation of income that was generated in its territory". 7
In contrast to the outcome in , the CJEU however clearly held in that distributions to resident and non-resident beneficiaries are indeed in the same situation (so that discrimination could arise). 8 This conclusion of the Court was based on two aspects: First, the Court noted that Austria, through its tax treaties, had voluntarily foregone its right to tax the beneficiaries and could therefore not argue that a conceptual requirement existed for it to levy a "substitute" tax at the level of the foundation. Second, the Court further noted that Austrian law would actually grant a refund of interim tax upon later dissolution of the foundation anyway. In other words, Austrian law actually treats foundations conceptually as tax free entities, so it could not argue that there is really a tax policy need to levy tax on the foundation's income.
On the basis of the established comparability of situations, the Court then conducted an analysis of the potential justifications. However, no valid justification could be found: First, the Court denied the "balanced allocation of taxing rights" argument...
