1ECJ Pending Cases from Austria - F.E. Familienprivatstiftung Eisenstadt and Finanzamt Linz

Claus Staringer 1

I. Overview

II. F.E. Familienprivatstiftung Eisenstadt (C-589/13)

A. Background: The "Interim Tax" Regime for Austrian Private Foundations

B. Issue: No Refund of Interim Tax upon Distributions to Tax Treaty Protected Non-Resident Beneficiaries

C. Relevant EU Fundamental Freedom

D. Justification Analysis

III. Finanzamt Linz (C-66/14)

A. Background: The Austrian Goodwill Amortization on Share Deals

B. Issue: Goodwill Amortization Only Possible for Acquisitions of Austrian Resident Target Companies

C. Justification Analysis

D. State Aid - Goodwill Amortization as a Privilege for Some Taxpayers?

E. State Aid - Goodwill Amortization as a Privilege for Acquisitions of Domestic Targets?

I. 2Overview

There are currently two direct tax cases from Austria pending before the ECJ: In (C-589/13) the court will have to deal with the issue of whether it is in line with the free movement of capital that Austrian law denies a private foundation the full refund of "interim tax" paid by the foundation upon a distribution that the private foundation makes to non-resident beneficiaries who are tax treaty protected (while such refund would be granted if there were no such tax treaty protection for the non-resident beneficiary). 2

In (C-66/14) the issue is whether it is in line with the freedom of establishment that the goodwill amortization on share deal acquisitions, as granted by Austrian law in the years at issue, is exclusively foreseen for the acquisition of domestic (i.e. Austrian) target companies (but no such goodwill amortization is possible for the acquisition of non-resident target companies, even if resident in another EU Member State). Further, the case also includes a state aid issue as to the alleged selectivity of the grant of the goodwill amortization only in specific situations while others remain excluded from it. 3

II. F.E. Familienprivatstiftung Eisenstadt (C-589/13)

A. Background: The "Interim Tax" Regime for Austrian Private Foundations

Since 1993, Austrian law has allowed for the establishment of private foundations (. Such private foundations are independent juridical persons, established by a founder (), but with an independent board () and without any ownership of the founder in the foundation or its assets. According to the foundation deed (), the board may (or even has to) grant distributions () to beneficiaries () of the foundation.

Initially (i.e. in the initial version of the tax regime for private foundations), the foundation was tax exempt on its investment income and capital gains derived from the alienation of shares. The concept of the taxation of foundations was that such income should not be taxed at the level of the foundation, but only in the hands of the beneficiaries, so that such income was therefore taxed only if and to the extent that it was later distributed to the beneficiaries. Tax was then levied on the distribution in the hands of beneficiaries at an income tax rate of 25 %. The result of that regime was a deferral effect, which could be significant if no or only small amounts of distributions were made to the beneficiaries. 4

3Over the years, the tax regime for foundations was changed to mitigate (and later abolish altogether) the deferral effect by introducing an "interim tax" () for the initially exempt income in the hands of the foundation. Such interim tax was 12.5 % in the years in dispute in the case. In later years it was increased to 25 % (then reaching the full level of standard Austrian corporate income tax, so that today no deferral effect exists anymore). 5 Technically, the interim tax is nothing other than a corporate income tax levied on the foundation's income. The term "interim tax" is however typically used to describe the intention of the law to levy a tax first at the level of the foundation, which is later refunded to the foundation if and to the extent that it makes distributions to beneficiaries. In other words, the sole purpose of the interim tax concept is to ensure that the above described deferral effect is mitigated (or abolished for the later years with a tax rate of 25 %). 6

Nonetheless, the initial concept of an ultimately tax free status for the foundation for investment income and capital gains from shares has in principle still been kept in place. This is clearly demonstrated by the fact that any residual interim tax, i.e. interim tax that has not yet been refunded to the foundation because no or not enough distributions have been made to beneficiaries, is ultimately refunded in full to the foundation upon its dissolution. 7 It is therefore ensured by Austrian law that the interim tax system does not lead to a final burden for the foundation over its lifetime.

B. Issue: No Refund of Interim Tax upon Distributions to Tax Treaty Protected Non-Resident Beneficiaries

The specific issue in the case at hand was as follows:

Unlike the system for foundations with domestic beneficiaries described above, no refund of interim tax was possible for the foundation under Austrian law upon distributions that were made to non-resident beneficiaries from tax treaty countries, who could benefit from a relief from Austrian tax on their distributions under a tax treaty concluded between their country of residence and Austria. 8 In such cases, the interim tax was refunded to the foundation only upon dissolution of the foundation (then in full). 9 Obviously, this can have a significant effect on the foundation's liquidity position as the refund may be deferred for a very long time (as typically such foundations are established for longer, i.e. up to 100 years, dissolution frequently cannot be expected in the near future).

4Therefore, the foundation is discriminated against in so far as its right for an immediate refund of interim tax is dependent on the tax status of its beneficiaries (non-resident or resident). 10 Contrary to what one might expect, the discrimination in the case at hand is not based on a different treatment of distributions to domestic and foreign beneficiaries in general. Rather, the relevant differentiation is made by Austrian law between distributions that can be and those which cannot be taxed in Austria in the hands of beneficiaries, which is expressed by the law by making reference to the existence or non-existence of a tax treaty relief. 11

The background to this reference to treaty protection is that under most Austrian tax treaties, distributions of foundations to their beneficiaries fall under the other income article (following Article 21 of the OECD Model). Austria as the source state is required to grant a full relief from Austrian tax on such "other income" in full (i.e. Austria cannot levy any tax on the other income). Also, the treaties applicable in the case at hand did not allow Austria to tax the distribution to the foreign...