A recent court case dealt with dividend payments from Austria to an intermediate EU holding company which has no substance (while its EU parent does).
In general, dividends paid out by Austrian corporations trigger a withholding tax of 27.5%. However, under the Austrian provisions implementing the EU Parent/Subsidiary Directive ("PSD"), outbound dividends are totally exempt from withholding tax if the parent company fulfils the criteria set out in art. 2 of the PSD and has held shares amounting to at least 10% of
the share capital of the Austrian subsidiary for an uninterrupted period of at least one year. If the one year holding requirement is not met, withholding tax falls due, but may be refunded upon application, provided that there is no abuse of law (Missbrauch).
In the case at hand, 40% of the shares in an Austrian corporation ("AutCo") were being held by a Luxembourg holding company ("LuxCo B"), the shares of which in turn were being held by another Luxembourg holding company ("LuxCo A"), above which was an unincorporated fund domiciled in the Cayman Islands, with mainly institutional investors from Australia, the USA and Canada. While LuxCo B did not employ staff, LuxCo A employed three individuals (a managing director, an accountant and an office manager) and had its own business premises. LuxCo A additionally held participations in entities operating in the infrastructure sector in Germany, Poland, Mexico and Austria via several intermediate holding companies.
LuxCo B received a dividend from AutCo, for which Austrian withholding tax was retained since the minimum holding period of one year had not yet been reached. After expiry of the one-year deadline, LuxCo B applied to the tax office for a refund of Austrian withholding tax, in line with the PSD. While the tax office and, subsequently, the Austrian Federal Tax Court (Bundesfinanzgericht) denied the refund, the Austrian Supreme Administrative Court (Verwaltungsgerichtshof) ruled in favour of the taxpayer on the basis of the following reasoning:
In order to rule out abuse of law, it suffices if economic activities are carried out not by the applicant itself (i.e., by LuxCo B), but by the EU-based parent company of the applicant (i.e., by LuxCo A). Due to the existence of sufficient substance within the EU, the non-EU entity behind the two-tier structure in Luxembourg should not be relevant for the permissibility of relief from withholding tax.