Taxation

Tax obligations

Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.

For the purposes of this question it is assumed that the fund vehicle is structured as a partnership, rather than as a corporation. Austrian partnerships are typically viewed as transparent for tax purposes, provided that the following is true:

  • the partnership’s sole activity qualifies as asset management for tax purposes; and
  • it is not deemed to conduct a business or commercial operation.

Any income derived by the partnership is instead allocated to its investors and taxed at their level in accordance with the rules of the tax regime applicable to the respective investor.

Domestic individual investors are taxed as follows:

  • capital gains are subject to a preferred tax rate of 27.5 per cent (as of 1 January 2016); and
  • dividends are subject to withholding tax at a rate of 27.5 per cent (as of 1 January 2016).

Domestic corporate investors are taxed as follows:

  • capital gains are taxed at a rate of 25 per cent if they relate to an Austrian-resident portfolio company and may be tax exempt if they relate to a foreign-resident portfolio company in which a minimum shareholding of 10 per cent is (indirectly) held for an uninterrupted period of at least one year (section 10 KStG); and
  • dividends are tax-exempt if they related to an Austrian-resident portfolio company or an EU-resident portfolio company and may be tax-exempt if they relate to another foreign portfolio company (section 10 KStG).

Foreign individual investors are taxed as follows:

  • capital gains are only taxable (at a rate of 27.5 per cent as of 1 January 2016) if the percentage of the investor’s (weighted) shareholding in the Austrian portfolio company (through the partnership) has been at least 1 per cent during the previous five years. Double tax treaties usually restrict Austria’s right to tax such capital gains (article 13, paragraph 5 of the OECD Model Tax Convention on Income and on Capital (MTC)); and
  • dividends are subject to withholding tax at a rate of 27.5 per cent as of 1 January 2016 (subject to reduction under applicable double tax treaties).

Foreign corporate investors are taxed as follows:

  • capital gains are only taxable (at a rate of 25 per cent) if the percentage of the investor’s (weighted) shareholding in the Austrian portfolio company (through the partnership) has been at least 1 per cent during the previous five years. Double tax treaties usually restrict Austria’s right to tax such capital gains (article 13, paragraph 5 of the MTC); and
  • dividends are subject to withholding tax at a rate of 25 per cent in the case where the exemption for foreign investors that are corporations resident in an EU member state is not applicable (but will usually be subject to reduction under applicable double tax treaties).

As of 1 January 2019, new provisions in connection with international participations and foreign portfolio shareholdings as well as CFC rules came into force.

MFG

MFGs are tax exempt for income from investments in participations made before 31 December 2012, meaning that the regime can no longer be used for new investments, but is still applicable to investments prior to such date. As mentioned, the tax benefits applicable to MFGs could partially be reintroduced (see question 1).

In order to qualify as an MFG, the vehicle must have a minimum share capital of €7.3 million, with public bodies and organisations holding no more than 50 per cent of the share capital and it may not carry out any business other than investment activities and related services. In addition, an MFG is subject to certain investment restrictions, in particular the following:

  • investments may not exceed €1.5 million per target and per 12-month period;
  • investments have to qualify as seed, start-up or expansion capital;
  • no investments can be made in businesses in distress (within the meaning of the EU guidelines on state aid for rescuing and restructuring businesses in distress) or the shipbuilding, coal and steel industries;
  • the MFG has to invest 70 per cent of its funds (the remaining 30 per cent can be held as cash, bank deposits or bonds);
  • investments have to be made in non-listed small and medium-sized enterprises within the meaning of Annex I to EU Regulation No. 70/2001 based in the EU or the EEA;
  • the MFG can only acquire minority participations of up to 49 per cent (at least 70 per cent of the investment must be equity); and
  • each participation in a target may only account for a maximum of 20 per cent of the MFG’s total equity capital.

To benefit from the tax exemption, the MFG must carry out the fund activity in accordance with section 6b of the KStG for at least seven years. If not, the tax exemption is retroactively revoked. MFGs are also tax-exempt from capital duty and stamp duty triggered in connection with their establishment.

The MFG’s distributions are taxed at investor level.

Domestic investors are taxed as follows:

  • dividends paid to domestic private investors are generally subject to withholding tax at a rate of 27.5 per cent (as of 1 January 2016); to the extent dividends are attributable to equity investments in an MFG to a nominal value of up to €25,000 (under the old regime) and up to € 15,000 (under the new regime) they are tax-exempt (section 27 of the Income Tax Act); and
  • dividends paid to domestic corporate investors are tax-exempt, irrespective of the percentage or the duration of the shareholding (section 10 KStG).

As of 1 January 2019, new provisions in connection with international participations and foreign portfolio shareholdings as well as CFC rules came into force.

Foreign investors are taxed as follows:

  • dividends paid to foreign individual investors are generally subject to withholding tax at a rate of 27.5 per cent (as of 1 January 2016); dividends paid to foreign corporate investors are generally subject to withholding tax at a rate of 25 per cent; if the foreign investor is a corporation resident in an EU member state, dividends will usually be tax-exempt; and
  • if the foreign (individual or corporate) investor is resident in a jurisdiction that has a double tax treaty with Austria, reduced tax rates usually apply.
Local taxation of non-resident investors

Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?

If the fund is structured as a limited partnership not deemed to conduct a business, non-resident investors are generally not required to file tax returns in Austria, subject to the following rules. If a capital gain is subject to taxation in Austria, the investor will be obliged to file a tax return, whereas in the case of dividends no reporting obligation is triggered. A refund, an exemption or a reduction concerning withholding taxes will also require filings with the tax authorities. Special forms provided by the Austrian tax authorities are used for the proof of residence outside Austria (and further substance requirements), which have to be submitted along with the filing with the tax authorities.

Local tax authority ruling

Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?

While it is certainly desirable to obtain a ruling from the Austrian tax authorities with respect to the tax treatment of the fund vehicle, the tax authorities are, however, rather reluctant to grant such tax rulings. Such rulings are generally not binding, unless governed by the ruling regime (which covers reorganisation, tax groups and transfer pricing, aspects of international law (beginning 1 January 2019), VAT law (beginning 1 January 2020) and a potential application of the abuse of law provisions (beginning 1 January 2019)) are not binding. The taxpayer may, however, be protected by the principle of equity and good faith. Based thereon, an assessed tax shall be waived if the party has made dispositions or transactions in reliance on the tax ruling and the following is true:

  • the ruling has been rendered by the competent tax authority;
  • the ruling is not evidently incorrect; and
  • the incorrectness of the ruling was not easily noticeable for the party.

There are no special tax rules relating to investors that are tax residents in Austria.

Organisational taxes

Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?

If the partnership is structured with no individual (but only a corporation) as general partner, as is usually the case, equity contributions had generally been subject to capital duty in the amount of 1 per cent. The same was true for fund vehicles structured as corporations. Since 1 January 2016, capital duty is no longer levied. Another area to consider is stamp duties, in particular in relation to guarantees that the formation documentation may entail. In this context it should be noted that surety agreements (including any form of assumption of a debt as joint debtor) are subject to stamp duty of 1 per cent of the secured amount provided that the surety is of an accessory nature, which means that the guarantor may avail itself not only of all defences that it personally has against the creditor, but also of all defences that the debtors of the secured debt have against the creditors. If the guarantee, however, is of an abstract nature, which means that the guarantor has to pay upon first demand and has recourse only to those defences that arise from the guarantee itself, then such transaction is not subject to stamp duty. Therefore, guarantee wordings explicitly stating that a specific guarantee is meant to be abstract are commonly used.

Special tax considerations

Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.

‘Carried interest’, which is defined as a compensation of a partner of an asset management partnership received because of outstanding contributions to a successful management of the investments, is included in the investment income according to the Department of International Taxation of the Austrian Ministry of Finance (EAS 3280 as of 14 May 2012; EAS 2698 as of 6 February 2006 and BMF 15 December 2008 [BMF 010221/3364-IV/4/2008]). Income qualifying as investment income received by an individual who is subject to unlimited taxation in Austria is taxable at the special tax rate of 27.5 per cent (as of 1 January 2016). Despite this administrative guideline, a case-by-case analysis is recommended, as the line between (self-) employed income and investment income is a rather unclear one.

The management fees received by a partner of an asset management partnership are not subject to VAT. According to the Austrian tax authorities, the general partner of a partnership is not an entrepreneur; his or her services are supplied in the exercise of a corporate function and not as a result of an exchange of services. If the fund vehicle is a corporation, however, the fees of a managing shareholder will usually be subject to VAT, unless the manager is employed by the corporation.

Tax treaties

Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.

Austria has entered into approximately 90 tax treaties (as of January 2017). According to the established practice of the Austrian tax authorities, a fund vehicle structured as a tax-transparent partnership is generally not entitled to treaty benefits. Rather, the investors themselves may rely on the tax treaty directly. If the fund vehicle is structured as a corporation, tax treaties will generally apply to the corporate fund vehicle itself.

Other significant tax issues

Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?

There are no other significant tax issues relating to private equity funds. However, there is a special tax regime for investment funds in Austria. A private equity fund should normally not be subject to this regime.