If an Austrian resident individual holds a participation of 50% in an Italian società a responsibilità limitata, which has opted for being taxed as a transparent entity under Italian tax law, the character of the foreign corporation has to be determined under Austrian law. The tax treatment is to be decided on a case-by-case basis according to the guiding principles of the Austrian (Corporate) Income Tax Act.
Primarily it shall be decisive whether the corporation established under foreign law is comparable to a corporation established under Austrian law. Although corporations fulfilling the criteria set out in Annex 2 to the Austrian Income Tax Act of art. 2 of Council Directive 2011/96/EU are regularly deemed to be entities subject to corporate income tax, a comparability test (Typenvergleich) has to be performed nonetheless. If the outcome of such a test evidences a legal entity's conformity with the structure of a specific Austrian company type (such as a limited liability company [Gesellschaft mit beschränkter Haftung] or a limited partnership [Kommanditgesellschaft]), the Austrian tax consequences foreseen for such a company type shall be applicable. In this regard, the qualification of the company or its shareholders under foreign tax law shall – importantly – not be decisive.
From this it can be gleaned that an Italian corporation, which is comparable to an Austrian corporation, does not lose its qualification as a separate taxable entity due to the fact that it is deemed to be a transparent (and thus a non-separate) entity after having exercised the option for transparency from an Italian tax perspective. Consequently, profits may be taxed in the year of accrual in Italy pursuant to art. 7 of the double taxation treaty concluded between Austria and Italy ("DTT AT/IT"), and in the year of distribution in the form of a dividend to the shareholders in Austria pursuant to art. 10 of the DTT AT/IT. From an Austrian perspective, such dividends constitute investment income taxable at a rate of 27.5%. Although this scenario gives rise to economic double taxation (i.e., taxation of the company's profits both in Italy and in Austria), the Austrian Ministry of Finance held that such double taxation is similarly inherent in the domestic legal landscape and is therefore justified. Finally, the Austrian Ministry of Finance stated that the Italian tax levied on the company's profits is not deemed to form part of the dividend distributed to the shareholder. The reason for this is that the amount which was used for paying the Italian tax cannot – from an economic point of view – be considered as having been received by the shareholder.