Recently, the Austrian Ministry of Finance assessed whether a Japanese pension fund is entitled to an exemption from Austrian withholding tax upon deriving dividends from an Austrian corporation.
Under domestic law, dividends distributed by an Austrian corporation to its share-holders are subject to withholding tax (Kapitalertragsteuer) at a rate of 27.5%. However, double taxation treaties typically provide relief. The convention between the Republic of Austria and Japan ("DTT Austria/Japan") applies to persons who are residents of one or both contracting states. The residence of a person and thus the entitlement to treaty benefits must (as is normally the case) be evidenced by way of a residence certificate issued by the Japanese authorities. According to the Austrian Ministry of Finance, for purposes of further assessing whether a pension fund is eligible for treaty benefits, such certificate shall explicitly designate that the entity in question is a pension fund within the meaning of the DTT Austria/Japan.
Pensions funds within the meaning of the DTT Austria/Japan that are resident in Japan may generally claim a full exemption from withholding tax on dividends from an Austrian corporation. However, such benefits may be denied again on the basis of the limitation of benefit clause in art. 22 of the DTT Austria/Japan. Pursuant thereto, pension funds may only claim an exemption from withholding tax for dividends by establishing that one of the following two criteria is fulfilled:
- at the beginning of the taxable year for which the claim is made, at least 50% of its beneficiaries, members or participants are individuals who are residents of either Japan or Austria, or
- at the beginning of the taxable year for which the claim is made, at least 75% of its beneficiaries, members or participants are individuals who are equivalent beneficiaries. The term "equivalent beneficiary" means any person who would be granted the same benefit by the source state under its domestic law or treaty law, had he or she received the dividend directly and not through the pension fund. From Austria's point of view, it is therefore imperative to determine at the level of the investor whether there are exemptions from withholding tax applying under domestic law or exemptions for dividends under double taxation treaties concluded between Austria and other states.
If the criteria are fulfilled, the entire amount of withholding tax levied on the dividends is to be refunded (and not only the part attributable to the investors who endow the pension fund with the entitlement to treaty benefits).
Consequently, in the course of a refund procedure it will be necessary to furnish (i) a certificate of residence; and (ii) documents designating the beneficiaries, members or participants of a pension fund, in particular their residency and status as natural persons. In the case of small investors (less than 10% interest in the fund), an estimate will be deemed as sufficient evidence if the estimation method is disclosed and, if necessary, an examination by way of administrative assistance is possible. In this case, a refund may only be requested by the pension fund itself; the foreign small investor does not have a separate opportunity to apply for a refund.