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Trusts, foundations and charities
Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?
Generally, Austrian law does not recognise the legal institution of trusts, but it is familiar with the term. Austria has neither codified nor ratified the Hague Trust Convention, which governs the recognition of trusts in the signatory states. However, following a 2017 European Court of Justice ruling (Panayi Trusts) which upheld the cross-border mobility of trusts and foundations, Austria must accept the legal influx of foreign trusts.
Various legal institutions exist under Austrian law whose functions are comparable to different types of trust. For purposes of asset management and estate planning, Austrian law recognises private foundations. As a transfer mechanism for financial transaction, Austrian law provides for investment and pension funds, but also a trusteeship, which is a separation of property in rem and beneficial ownership.
What rules and procedures govern the establishment and maintenance of trusts?
There are no provisions concerning the establishment and maintenance of trusts.
How are trusts taxed in your jurisdiction?
A foreign trust may be regarded as either a ‘transparent’ (ie, disregarded for tax purposes) or an ‘intransparent’ entity (ie, a taxable subject for corporate income tax purposes). In case of a transparent trust, the income of the trust is directly allocated either to the beneficiaries or the settlor, and is subject to tax in their hands.
An intransparent foreign trust is regarded as a taxable entity and, as such, not subject to tax in Austria unless – in accordance with the relevant double tax convention – a right of taxation is allocated to Austria as the state of source. Distributions of the (intransparent) trust to individuals are subject to Austrian income tax. In case of a distribution by a foreign foundation or estate that is comparable to an Austrian private foundation, the special tax rate of 27.5% applies to the distribution.
In principle, a foreign trust is treated as intransparent and is deemed a taxable entity for income tax purposes if it fulfils the criteria of a discretionary trust as defined by the case law of the Supreme Administrative Court. The court’s criteria include that the trust must be irrevocable and the beneficiaries must neither have a right to dispose of the trust’s assets nor influence the management of the trust. If not all of those criteria are met, the trust is regarded as transparent and its assets are allocated to the beneficiaries from an Austrian tax perspective. Whether the trust is treated as transparent or intransparent must be determined on a case-by-case basis, considering the overall picture of the trust at hand.
Foundation entrance duty (applicable for donations to the trust) is imposed on donations to intransparent trusts if the donating person is resident in Austria for tax purposes. Foundation entrance duty amounts to 2.5% or 25% of the value of the donations. The tax rate of 25% is applicable in the case that either:
- the trust is not comparable to an Austrian private foundation from a corporate perspective;
- the trust (even if comparable) does not properly disclose all of the information required by the Foundation Entrance Tax Act, among which its foundation documents, to the Austrian tax office in charge until maturity of the duty; or
- no convention on the mutual information exchange and the mutual collection of taxes is applicable with the residence state of the trust.
Foundations and charities
Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?
A private foundation is recognised in Austria as Privatstiftung. It is a legal entity whose internal organisation and purpose are largely determined by the founder. The private foundation’s structure largely resembles that of a limited company, but with beneficiaries instead of proprietors.
Austrian law also recognises another form of foundation, which is exclusively for charitable purposes. The regulations for this type of foundation essentially follow those applying to private foundations.
What rules and procedures govern the establishment and maintenance of foundations and charities?
A private foundation is founded by way of a declaration of establishment that is subject to certain rules and procedures. The private foundation comes into legal existence once registered in the Commercial Register. In the declaration of establishment, the founder declares that he or she wants to withdraw specific assets from his or her own assets, transfer those assets to a private foundation as a legally independent entity and earmark them for a special purpose.
The declaration of establishment can define the purpose of the private foundation by either general or precise terms. By means of a precise definition of the purpose of the private foundation, the founder can determine the fortunes of the private foundation for a long time after his or her death. Apart from the limitations arising from the purpose of the private foundation, the Austrian Private Foundation Act expressly and exhaustively restricts the activities of a private foundation. The founder must endow the private foundation with assets of at least €70,000 when he or she establishes the private foundation. In addition to cash, contributions to a private foundation may take the form of:
- equity interests;
- real estate; and
- art collections.
Additional assets may be contributed to the private foundation after it has been established.
How are foundations and charities taxed?
Austrian private foundations are treated as corporations under the Corporate Income Tax Act. They are subject to the ordinary corporate income tax rate of 25% on their worldwide income.
A withholding tax of 27.5% is also imposed on distributions made to private foundations’ beneficiaries, although this will be (fully or partly) relieved if double taxation conventions exist with the countries in which the beneficiaries are residents.
Austrian private foundations that have disclosed their beneficial ownership information, as well as founding documentation, to the tax office in charge benefit from a special tax regime for their non-business income. This regime consists of interim taxation for investment income and income derived from alienation of real estate as defined in a catalogue of the Corporate Income Tax Act (ie, interest income, capital gains from securities and from real estate).
As with the general corporate income tax, interim tax amounts to 25%. To avoid dual taxation of income distributed by the private foundation, the tax base for interim tax is effectively reduced by the distributions that the private foundation makes to its beneficiaries. Further, a roll-over relief for capital gains realised from substantial participations is available if other substantial participations are acquired by the private foundation within 12 months. Other income (eg, rental income) is subject to the ordinary corporate income tax.
In principle, foreign foundations and charities that are comparable to an Austrian corporation and fulfil the discretionary trust criteria (see above “How are trusts taxed in your jurisdiction?”) are also taxed like corporations and are subject to corporate income tax with their income allocated to Austria (in accordance with the relevant double taxation convention) as the state of source. Distributions of foreign foundations and charities to Austrian resident settlers or beneficiaries are subject to Austrian income tax at the level of the Austrian resident settlers or beneficiaries. In case of a distribution by a foreign foundation or charity that is comparable to an Austrian private foundation, the special tax rate of 27.5% applies to the distribution at the level of the Austrian resident settlers or beneficiaries. In case the foreign foundation or charity is not comparable to an Austrian corporation or does not fulfil the discretionary trust criteria, its assets and income are directly allocated to its settlers or the beneficiaries.
Foundation entrance duty is imposed on contributions made to the foundations or charities if either the foundation or the donator is resident in Austria for tax purposes.
There are corporate income tax exemptions for donations to charitable foundations.
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