The Austrian Ministry of Finance recently dealt with an interesting case of dividend payments made from an Austrian corporation to the Austrian permanent establishment of a French indirect shareholder.

Under the Austrian provisions implementing the EU Parent/Subsidiary Directive (cf. sec. 94(2) of the Austrian Income Tax Act [Einkommensteuergesetz]), outbound dividends paid to non-resident shareholders are exempt from withholding tax in Austria, if (i) the shareholder holds a stake of at least 10% in the share capital of an Austrian corporation; and (ii) if the participation has been held for an uninterrupted period of at least one year. If the receiving company is resident in Austria, no minimum holding period is required for the exemption from withholding tax.

The Austrian Ministry of Finance recently established that dividends paid by an Austrian corporation held via a two-tier Austrian partnership structure to its French indirect shareholder are not subject to withholding tax in Austria even if the minimum holding period has not been completed (EAS 3409). The reasoning is based on the following grounds: If the shareholding is functionally attributable to an active trade or business of a domestic (partnership) permanent establishment of a corporation resident in an EU/EEA state, then the freedom of establishment requires that the exemption from withholding taxation applies to corporations resident in an EU/EEA state without the restrictions for foreign companies, i.e. irrespective of the one-year retention period and the additional documentation requirements, in particular a residence certificate.

In the view of the Ministry of Finance, documentation evidencing the entitlement to the withholding tax exemption, nevertheless, has to be kept, e.g., a residence certificate and a written declaration of the non-resident taxpayer, confirming the attribution of the participation to the domestic permanent establishment.