On March 7 2002 the Austrian Constitutional Court issued a decision of particular importance for foreign investment funds. The case concerned the discriminatory treatment of holders of foreign investment fund certificates under current domestic tax law. Following the decision, the acquisition of such certificates is likely to be more attractive for individual Austrian investors.

An investment fund is deemed to be 'domestic' if its management company is situated in Austria.Under current Austrian income tax law, the income derived by an individual from Austrian investment funds is subject to a 25% final withholding tax rate insofar as it results from:

  • dividends of domestic corporations;
  • bonds or other securities representing money claims, the coupons of which are located with an Austrian bank; or
  • cash deposits held at Austrian banks.

In contrast to income received from domestic investment funds, income derived from foreign investment funds is taxed by up to 50%.

On March 7 2002 the court ruled that the different tax rates are unconstitutional. The Austrian Income Tax Act must be amended by March 31 2003 to bring it into line with the Final Withholding Tax Act.

The ultimate legal consequences of the decision are unclear. Generally, the new legislation is expected to have to avoid any discriminatory tax treatment of interest received on bonds through Austrian and foreign investment funds. Therefore, interest on bonds received through foreign investment funds should also qualify for final withholding tax in the future. However, no changes are expected regarding the taxation of foreign dividends (which are currently subject to taxation of up to 50% while domestic dividends are subject to a final withholding tax of just 25%). Moreover, it is unclear whether the court's decision affects only so-called 'white' funds (ie, foreign funds which have an Austrian tax representative and which are publicly traded in Austria), or whether it also impacts on 'black' funds (ie, those with no Austrian tax representative and no public trading).

For further information on these topics, please contact Reinhard Leitner or Gerald Gahleitner at Leitner & Leitner by telephone (+43 7327 0930) or by fax (+43 732 7093 303) or by email ([email protected] or [email protected]).