The Austrian Ministry of Finance recently dealt with the question whether dividends distributed by an Austrian limited liability company to its German shareholders were subject to withholding tax in Austria.
In the case at hand (EAS 3414), a 49% participation in an Austrian limited liability company (Gesellschaft mit beschränkter Haftung; GmbH) was directly held by one German passive holding company ("HoldCo A") and a 51% participation by another German passive holding company ("HoldCo B"), with HoldCo A in turn indirectly holding 100% of the shares in HoldCo B through an operative German partnership.
Generally, dividends distributed by an Austrian corporation to its shareholders are subject to withholding tax (Kapitalertragsteuer) at a rate of 27.5%. Under the Austrian provisions implementing the EU Parent/Subsidiary Directive ("PSD"), outbound dividends are entirely exempt from any withholding tax in Austria if an EU company meets the criteria provided in art. 2 of PSD and holds a participation of at least 10% in the share capital of, inter alia, an Austrian limited liability company, with the participation having been held for an uninterrupted period of at least one year. However, in certain cases withholding tax has to be withheld (and a refund application may subsequently be filed by the parent company), inter alia, in case of circumstances indicating abuse of law. An abuse of law can only be excluded upfront if certain substance requirements (engagement in an active trade or business rather than in mere passive activities; employment of own staff; existence of own premises) are met, and there are no grounds for the company in charge of withholding the tax to doubt the accuracy of this declaration. In order to prevent directive-shopping, tax-free distributions of profits of Austrian companies to EU holding companies shall not be permitted in case such holding companies do not perform any functions. The relief from withholding taxation at source shall, however, be
possible if the indirect shareholder is an operative EU company which itself qualifies for relief at source. Depending on whether the holding company is to be regarded as having no function or as having an economic function, different types of evidence are required in order to prove that no abuse of law is given:
- If the direct holding company performs own economic functions, it has to complete the relevant form ZS-EUMT together with a certificate of residence and a declaration of substance from its parent company.
- If the direct holding company does not perform any economic functions, it has to submit a declaration explaining that its income is not attributable to itself but to its parent company together with the relevant form ZS-EUMT completed by its parent company.
The Ministry of Finance further pointed out that apart from the mentioned cases, in which abuse can be excluded from the beginning, abuse generally requires a case-by-case examination, which can only be carried out by determining the relevant facts and thus only by the competent tax office.
In the case in at hand, abuse could not be excluded upfront because the shareholders of HoldCo A were not revealed to the tax office which thus could not determine whether the shareholders would meet the requirements for exemption from withholding tax at source themselves. The mere fact that HoldCo A ultimately has a 100% interest in an operational partnership cannot exclude abuse. The Ministry of Finance therefore concluded that the Austrian limited liability company in the case at hand has to withhold tax on the dividend, which may be repaid in a subsequent reimbursement procedure. The application for refund may be filed only by the parent companies (HoldCo A and HoldCo B).