All posts by Rudolf Krickl

About Rudolf Krickl

Email: [email protected]
Tel: +43 1 501 88 3420

Rudolf is a partner at PwC Austria. He has more than 19 years experience in advising national and multinational companies. Rudolf's areas of expertise are international tax planning, M&A, transfer pricing, cash pooling, taxation of private foundations and business valuations for tax purposes.

Rudolf is a member of the Austrian Chamber of Chartered Accountants as Tax advisor, member of the Tax Expert Board of the Austrian Chamber of Chartered Accountants and several working groups thereof.

Rudolf released publications in several professional journals and performs different lecture activities.

Austrian taxation of private foundations in connection with profit allocations to foreign beneficiaries contrary to EU law (C-589/13)

On 17 September 2015, the Court of Justice of the European Union (‘CJEU’) rendered its decision in the case F.E. Familienprivatstiftung Eisenstadt (C-589/13) concerning the Austrian system of interim taxation of national private foundations in the case of profit allocations made to non-resident beneficiaries. The CJEU held that the unfavorable treatment of private foundations which make profit allocations to non-resident beneficiaries as compared to those making profit allocations to local beneficiaries infringes the free movement of capital.

The Austrian system of interim taxation

In the given case an Austrian private foundation generated capital gains which fell under the Austrian system of ‘interim taxation’. Under this taxation scheme certain profit items (i.e. certain capital gains and income from the disposal of private real estate) of a private foundation are subject to an interim tax at a rate of 25 % (corporate income tax). Before the introduction of the interim tax these profit items remained untaxed at the level of the private foundation and only the profit allocations to beneficiaries made out of this income were taxed with WHT at a rate of 25%. That mechanism allowed private foundations to reinvest profits from capital investments without consideration of any tax reductions which led to higher investment income as long as no profit allocations were made (‘snowball-effect’). However, this beneficial tax treatment – due to political reasons – had to be limited which resulted in the implementation of an interim tax. Since the interim tax should not lead to a higher overall tax burden on these profit items than under the old system (overall 25% tax burden), the base of the interim tax was reduced in so far as any profit allocations were made to beneficiaries in the same assessment period, provided the profit allocations – which are in principle subject to WHT – were not fully or partly exempted on the basis of a DTC (regularly fulfilled in case of domestic beneficiaries). If profit allocations are made in the following years for which WHT has been withheld, interim tax will be credited (in the amount of 25% of the profit allocations). Upon termination of the private foundation all interim tax not credited so far, will be refunded then.

Scenario with foreign beneficiaries:Scenario without foreign beneficiaries:

The facts of the case

In the case at hand an Austrian private foundation made profit allocations to beneficiaries resident in Belgium and Germany which requested relief from the WHT deducted from their profit allocations based on the applicable DTC’s. Consequently, the Austrian tax authorities denied the corresponding reduction of the profit subject to interim tax at the level of the private foundation in the same period. The private foundation appealed before the Federal Fiscal Court (Austrian Tax Court of 2nd Instance) against this decision. However, the Federal Fiscal Court upheld the decision of the tax authorities by stating that exemption from WHT was granted in respect of the profit allocations on the basis of the DTCs, which meant that these profit allocations could not be deducted from the taxable amount of the interim tax. In a next step, the private foundation appealed against the decision of the Federal Fiscal Court before the Austrian Administrative High Court (VwGH). The Administrative High Court held it likely that the unfavorable treatment of private foundations, which arises only in the case of profit allocations to foreign beneficiaries but not in the case of profit allocations to domestic beneficiaries constitutes a restriction of the free movement of capital and referred the following question to the CJEU for a preliminary ruling: ‘Is Article 56 EC to be interpreted as precluding a system for the taxation of capital gains and income from the disposal of holdings of an Austrian private foundation in the case where that system provides for a tax charge to be imposed on the foundation in the form of an ‘interim tax’ in order to ensure single national taxation only in the case where, on the basis of a double taxation convention, the recipient of [profit allocations] from the private foundation is exempt from capital gains tax which in principle is chargeable on [profit allocations].’

The CJEU’s decision

According to the CJEU, profit allocations made by private foundations fall under the provisions of the Treaty on the movement of capital. Such profit allocations can be compared with gifts and therefore the application of Art 63 TFEU can be derived from the judgements in Persche[1] and Mattner[2]. Both the initial contribution of the assets to the private foundation by the founder as well as the subsequent payments made from profits generated by those assets to the beneficiaries fall within the concept of ‘movement of capital’ within the meaning of Art 63 para 1 TFEU.[3]

With regard to a possible infringement of that fundamental freedom the CJEU first argues that the different treatment of Austrian private foundations in their right to an immediate reduction of the interim tax base (depending on whether the beneficiaries of the profit allocation are or are not subject to Austrian WHT) forms – due to the associated liquidity disadvantage – a restriction of the free movement of capital. Although profit allocations for which such a right to immediate reduction or immediate reimbursement is excluded can also include profit allocations to beneficiaries residing in Austria where those beneficiaries are exempted from WHT, they cover in particular profit allocations made to non-resident beneficiaries in so far as under Art 21 DTC such profit allocations are not taxable in Austria since they are subject to the exclusive powers of taxation of the State of residence of the beneficiary.[4]

The CJEU concluded that the making of profit allocations by private foundations to resident beneficiaries is a situation objectively comparable to that where the same private foundations make profit allocations to beneficiaries residing in another Member State. Since Austria renounced the exercise of its powers of taxation over profit allocations to persons residing in other Member States, it cannot invoke a difference in the objective situation between resident private foundations which make profit allocations to domestic and those which make profit allocations to foreign beneficiaries in order to subject private foundations making profit allocations to the latter to a specific tax on the ground that those beneficiaries are not subject to its tax jurisdiction.[5]

The difference in treatment cannot be justified by an overriding reason in the public interest. As Austria, via the conclusion of DTC, has abandoned its powers of taxation on profit allocations to persons residing in other Member States, Austria cannot refer to a balanced allocation of powers of taxation in order to levy a specific tax on foundations that make profit allocations to such persons on the basis that those persons are not subject to its tax jurisdiction.[6]

The Court then went further to state that a ‘principle of single taxation’ has never been accepted as a distinct justification. According to settled case law any advantage resulting from the low taxation to which a subsidiary is subject cannot by itself authorise another Member State to offset that advantage by less favourable tax treatment of the parent company.[7] These considerations also apply to the case at hand, concerning a difference in tax treatment of private foundations according to whether the profit allocations they have made lead to their beneficiaries being taxed in Austria.

The restriction neither can be justified by the need to safeguard the coherency of the national tax regime. The coherency argument requires a direct link to be established between the tax advantage concerned and the offsetting of that advantage by a particular tax. According to the CJEU no such a direct link exists in the present case because of two reasons. First, the benefit of the reduction of the interim tax and the taxation of the beneficiaries concern different taxpayers. Secondly, whereas the tax advantage of the foreign beneficiary consists in a permanent exemption from the WHT, a private foundation suffers only a temporary disadvantage due to the interim tax. This is because all interim tax (insofar not credited till then) will be refunded upon termination of the private foundation.

Conclusion

This decision of the CJEU makes clear that the Austrian system of interim taxation, which refuses the right to deduct WHT-exempt profit allocations to foreign beneficiaries from the taxable basis of the interim tax, is not in line with EU law. Profit allocations of Austrian private foundations made to domestic and foreign beneficiaries should lead to a corresponding reduction of interim tax, irrespective of any tax treaty benefit applied to the profit allocations. Since the free movement of capital also applies to third country situations profit allocations to beneficiaries residing in countries outside the EU should qualify for a corresponding reduction of interim tax as well.

Way forward

Under a bill issued on 9 December 2015 the system of interim taxation was modified in order to address the CJEU judgement in F.E. Privatstiftung Eisenstadt. The new system came into force on 1 January 2016. Under the new system profit allocations to foreign beneficiaries should lead to a reduction from interim tax insofar as the profit allocations are definitely charged with Austrian WHT. Profit allocations that are only partly exempt from WHT tax, would then partly be recognized for the reduction from interim tax. Under the old system of interim taxation a partial reduction from WHT led to a full denial of reduction from interim tax.

In the event of termination of the private foundation it is now foreseen that not all interim tax will be refunded anymore, but also only to the extent (final) profit allocations are definitely charged with WHT. This amendment could even lead to situations were private foundations with foreign beneficiaries are tax even worse under the new system as compared to the old system.

As under the new bill a private foundation with foreign beneficiaries would still be treated less favorably than one with domestic beneficiaries also the new bill seems to violate EU law.

As already described above the justification of the old system of interim taxation based on the coherency of the Austrian tax system failed because of two reasons: (a) the benefit of the reduction of the interim tax and the taxation of the beneficiaries concern different taxpayers and (b) whereas the tax advantage of the foreign beneficiary consists in a permanent exemption from the WHT, a private foundation suffers only a temporary disadvantage due to the interim tax. By the new system of interim taxation (i.e. refund of interim tax upon termination of the private foundation only to the extent (final) profit allocations are definitely charged with WHT) only point (b) will be taken account of. However in its judgement F.E. Familienprivatstiftung Eisenstadt, the CJEU explicitly states the justification based on the coherency of the national tax system, fails ‘for several reasons’.[8] Therefore point (a) still prevents a justification of the new system of interim tax on the basis of the coherency argument.

To sum up the CJEU in its judgement F.E. Familienprivatstiftung Eisenstadt concluded that profit allocations to foreign beneficiaries should always lead to a full corresponding reduction of interim tax, irrespective of any DTC exemption. The Austrian legislator should therefore re-implement the system of interim taxation in a way that it does not differentiate between WHT-exemption anymore. For now it seems highly questionable whether the CJEU would accept the new system which came into force beginning of 2016. Therefore, Austrian private foundations with foreign beneficiaries which are subjected to significant interim tax and do not benefit from a reduction of it due to the regulation above should analyse whether it makes sense to challenge the Austrian regulation by referring to EU law.

[1] EU:C:2009:33 (Persche), para 27.

[2] EU:C:2010:216 (Mattner), para 20.

[3] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 39.

[4] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 43.

[5] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 64.

[6] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 71.

[7] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 76.

[8] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 82.

Austrian goodwill amortization: AG Kokott issues her opinion on a landmark case for the relation between state aid and treaty freedoms

On 16 April 2015, Advocate General Kokott („AG“) advised the CJEU to rule that the exclusion of foreign EU group members of an Austrian tax group from the goodwill amortization scheme is not in line with the freedom of establishment. The AG, furthermore, argued that the scheme does not constitute illegal State aid due to the lack of selectivity.

Treaty Freedoms vs. State Aid Rules

The case Finanzamt Linz vs. Bundesfinanzgericht, Außenstelle Linz (C-66/14) is expected to result in a landmark decision of the CJEU. The importance of the case is that it deals with an Austrian tax regulation which may simultaneously infringe the freedoms of the treaty (freedom of establishment) and the state aid rules of the EU.

The mentioned combination of conflicts brings up fundamental questions, i.e. the interaction between treaty freedoms and state aid rules. The issues gives rise to a potential conundrum because in the context of alleged “aid” in relation to domestic transactions, the respective remedies for unlawful state aid and the breach of freedoms are, in effect, opposites. Unlawful state aid has to be repaid which – in the given situation – results in a non-application of the goodwill amortization scheme. However, the scope of a discriminatory rule has to be extended which would require the amortization scheme to be applied to all investments (domestic and foreign targets). The solution for this conflict cannot be derived from the already existing case law of the CJEU. Tax experts were therefore looking forward to the opinion of AG Kokott which is laid down in the following.

Facts and Circumstances

Group taxation system

The Austrian Corporate Income Tax Act (KStG) offers legally independent companies belonging to a group of companies the opportunity to form a tax group, with the result that the income of all tax group members is taxed in an added up way at the level of the group parent. This has the effect that the income of all group members is taxed in the hands of the parent company of the tax group. The main requirement for two or more companies to establish a tax group is that the group parent company holds an investment in the subsidiaries of more than 50%. Also foreign companies can take part in the tax group, if they are directly owned by a domestic group member. Therefore only first-tier foreign subsidiaries may become members of a tax group. The tax group scheme provides for the attribution of 100% of profits/losses of a domestic group member to the group parent even though the actual participation might be lower. In the case of foreign group members only losses are attributable to the parent company according to the percentage of the participation. There is a recapture of taxes when the foreign losses are set off against profits abroad in subsequent years or if the foreign group member ceases to be a group member.

Goodwill amortization

Fore share acquisitions prior to March 2014, tax groups could amortize the goodwill resulting from the purchase of Austrian group members with an active business.[1] Following this scheme the goodwill inherent in the acquisition cost was amortized on a straight-line basis over a period of 15 years. In order to avoid constitutional concerns goodwill that resulted from acquisitions prior to March 2014 and which has not fully been amortized upon March 2014, can be further amortized if the possibility of the goodwill amortization had an impact on the purchase price of the participation. As the goodwill amortization was limited to domestic participations, foreign EU group members were excluded from the scheme.

Litigation procedure

An Austrian taxpayer (a tax group which acquired a non-privileged Slovak subsidiary) concerned by the goodwill amortization started a litigation process, because under its opinion it infringed the freedom of establishment. The court of first instance (=Federal Tax Court Linz) in its decision on 16 April 2013 followed the taxpayer’s argumentation, classified the Austrian goodwill amortization as being not in line with the freedom of establishment and extended the goodwill amortization also to foreign group members.[2] After the Austrian tax office involved has appealed against this decision, the Austrian Administrative High Court (VwGH) referred two questions with regard to the goodwill amortization scheme for preliminary ruling to the CJEU.[3] The Court raised the question whether (a) the scheme constitutes illegal State aid for the beneficiaries of the scheme as defined under Article 107 TFEU and (b) the exclusion of foreign EU group members from the scheme was in line with the freedom of establishment.

Opinion of the AG

Freedom of establishment

According to AG Kokott the exclusion of foreign EU group members from the amortization scheme restricts the freedom of establishment. Since the AG found the domestic and the cross-border scenario comparable, she examined whether there was any justification for limiting the amortization scheme to just domestic targets. The representatives of the Austrian Government argued that the exclusion of foreign participations is required in order to maintain the coherence of the Austrian tax system. They based the coherence argument on the fact that under Austrian corporate income tax law capital gains from domestic participations are taxable and therefore the goodwill amortization provides a temporary liquidity advantage only, while capital gains from foreign participations are, in most cases, tax exempt with the requested goodwill amortization resulting in a permanent tax advantage which was not the intention of the Austrian lawmaker. The AG rejected this justification on the grounds of the coherence of the Austrian tax system because the goodwill amortization scheme was even not open to taxpayers who opted for tax liability of their participations in foreign EU group members according to § 10 Par 3 Nr. 1 KStG.[4] Since there were no other justification grounds the AG came to the conclusion that the goodwill amortization scheme infringes the freedom of establishment.[5]

State aid assessment

  1. The concept of selectivity

With regard to the State aid assessment the AG argued that the goodwill amortization confers a tax advantage for its recipients pursuant to Art 107 para 1 TFEU. The advantage was also granted through state resources. For the selectivity test of the measure the AG modified the traditional selectivity examination scheme, where one has to first identify the “normal” taxation approach (“derogation approach”). As the referring Court suspects that the different treatment of (a) companies and individuals, of (b) companies within a tax group and outside a tax group and of (c) companies which acquire domestic participations and companies which acquire foreign participations might be selective, one “normal” tax regime cannot be identified.[6] Therefore it is solely important whether comparable legal and factual situations are treated differently and whether this different treatment leads to a selective advantage for certain industries or undertakings (“comparability approach”). The argumentation of the AG is in line with the present case law of the CJEU, which considers the selectivity examination also as an examination of comparability. For example in the Gibraltar judgement the CJEU classified a tax-exemption to offshore companies as selective, even though less than 1% of companies were actually taxed.[7]

  1. Assessment of the goodwill amortization scheme

According to the AG the refusal to grant the goodwill amortization to individuals and to companies which are not part of a tax group cannot be considered to be state aid, since these persons are not in a comparable factual and legal situation with companies, which are members of a tax group. The AG suggests a less stringent comparability test for pure domestic situations as compared to cross-border situations. This is due to that fact that only unfavorable treatment of cross-border cases compared to domestic cases are covered by the EU Treaties.[8]

AG Kokott then states that the goodwill amortization scheme, by excluding foreign EU group members, treats taxpayers in comparable legal and factual situations differently. Consequently the goodwill amortization constitutes an advantage to companies, which acquire domestic participations, compared to companies which acquire foreign participations. This unequal treatment is not justified by the basic or guiding principles of the Austrian tax system. Therefore the goodwill amortization scheme can be regarded as a subsidy in the narrow sense (which cannot be justified by the basic or guiding principles of the Austrian tax system).[9]

However, as the scheme covers all sorts of domestic companies, it does not favor certain industries or undertakings and therefore it is not qualified as being selective. The advantage is rather that all companies within a tax group irrespective of the economic sector they perform, receive a subsidy for acquiring domestic participations.[10] With this reasoning the AG follows the view taken by the European Court of First Instance in two cases regarding the Spanish goodwill amortization (Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10).[11] There the Court concluded that the granting of a goodwill amortization only in relation with the acquisition of foreign participations was not selective since the scheme was in principle open to all companies and did not exclude a specific group of undertakings. In order to confer a selective advantage, a tax rule would have to characterize the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category.[12] The mere fact that the tax rule/benefit is subject to conditions could not, alone, render it selective in favor of undertakings satisfying this conditions. Otherwise, any tax relief subject to conditions would be state aid. The AG furthermore argues that a too broad understanding of the terms ‘certain undertakings’ and ‘production of certain goods’ and ultimately ‘selectivity’ entails the risk to affect the distribution of competence between Member States and the EU as foreseen in Art 2 to 6 TFEU as well as between the European Parliament/Council of the European Union (Art 14 TEU) and the European Commission (Art 17 TEU). Consequently, the AG came to the conclusion that the goodwill amortization scheme does not constitute illegal State aid.[13]

Way Forward

The opinion of the AG provides an important indication on how the CJEU could qualify the Austrian goodwill amortization scheme. It is expected that the CJEU will render its decision still in 2015.

Until then, Austrian tax groups with foreign EU group members, which were purchased before 1 March 2014 and where the holding company exercised the option for tax liability according to § 10 Par 3 Nr. 1 KStG should, if not already done, examine their tax positions and assess whether they could benefit from the goodwill amortization scheme or not. The prerequisite that the goodwill amortization had to have an impact on the purchase price of the participation is also likely to infringe the freedom of establishment and should therefore not prevent tax groups from obtaining the goodwill amortization for their foreign EU group members.

[1] In 2014 the goodwill amortization concept was abolished for new acquisitions due to the possible infringement of EU-law.

[2] Federal Tax Court (former „UFS“, now “Bundesfinanzgericht”) Linz, 16 April 2013 (RV/0073-L/11).

[3] Austrian Administrative High Court, 30 January 2014 (Zl. 2013/15/0186).

[4] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 61.

[5] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 69.

[6] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 88.

[7] Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.

[8] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 91.

[9] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 104.

[10] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 111.

[11] Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10.

[12] Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.

[13] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 117.