With the amendment of the Austrian investment fund regime by virtue of including alternative investment funds into its scope, the tax aspects of re-qualifications of existing (private equity) vehicles into investment funds and thus the application of the Austrian investment fund tax regime were rather unclear. With a newly-published opinion, the Austrian Ministry of Finance has now shed some light on its view on selected tax aspects of such re-qualification.
Austrian tax law provides for a specific tax regime for investment funds. This regime is in particular characterised by the fact that an investment fund is not treated as a separate taxable entity, but rather as a look-through vehicle, with any income being taxable on the level of the investors. Such view applies to both Austrian and non-Austrian investment funds.
In the course of the 2013 enactment of the Austrian Alternative Investment Funds Managers Act ("AIFMA"), which implements the provisions of the EC Directive 2011/61/EC on Alternative Investment Fund Managers ("AIFMD") into Austrian law, significant amendments were made to the definitions of the terms "Austrian investment fund" and "foreign investment fund" for tax purposes. Both terms now also comprise alternative investment funds that may be set up as a corporation, partnership, fund structure or any other type of vehicle, irrespective of their residence -- and thus be possibly subject to the Austrian fund taxation regime. Considering the structures that the AIFMD targets in particular, these amendments are of significant importance for private equity fund vehicles.
As a result of the rather broad definition of the term investment fund for Austrian tax purposes, also those entities set up as corporations may be regarded as investment funds from a tax perspective, in particular if they fulfill the criteria of an alternative investment fund. As a result, these corporations may be recharacterised into look-through entities for tax purposes. Besides other tax-related topics, the potential tax aspects of such recharacterisation, in particular taxation of hidden reserves on the level of the corporate fund vehicle, had been discussed in legal writings, but the Austrian tax authorities had not provided any guidance in this respect.
Austrian Ministry of Finance on recharacterisation of entities into investment funds
Just recently, the Austrian Ministry of Finance published its opinion on specific aspects relating to the amendment of the Austrian investment fund tax regime in the course of the enactment of the AIFMA.
In relation to an Austrian corporation that qualifies as an alternative investment fund for Austrian regulatory purposes, the Ministry of Finance takes the view that such qualification is also binding for Austrian tax purposes. As a result, the Austrian corporation loses its shielding effect for Austrian tax purposes and will instead become subject to the Austrian investment fund tax regime. Pursuant to the Austrian Ministry of Finance's view, this development leads to the realisation of any hidden reserves on the level of the Austrian corporation and thus to a 25% Austrian corporate income tax falling due on any difference between the fair market value and the book value of the corporation's taxable assets. Assets that are comprised by a tax exemption (eg qualified participations in non-Austrian subsidiaries) remain tax-exempt. On the level of the shareholders, no taxable event is assumed.
As a result of the Austrian corporation's qualification as an alternative investment fund, its "distributions" will no longer be treated as dividends, but rather as distributions from an investment fund, which trigger Austrian withholding tax in case a credit institution acts as a paying/depository agent. The notification obligations of the fund (or the investor, as the case may be) must be complied with in order to avoid a lump-sum taxation of future "deemed" distributions on the level of the investor according to Austrian fund taxation rules.
In addition to the potential tax aspects of a re-qualification of Austrian or non-Austrian partnerships into (alternative) investment funds addressed in the note, the Ministry of Finance maintains its view that if eg a German corporation is treated as an alternative investment fund for (German) regulatory purposes, such qualification will be relevant for Austrian tax purposes, irrespective of the actual tax treatment of such vehicle in Germany. Any income of such German vehicle will thus directly be attributed to the investors from an Austrian tax perspective, which may entail a conflict of income attribution between Austria (where income is attributed to the investors) and Germany (where income is attributed to the vehicle itself). Based on tax treaty law principles, Austria as the investors’ state of residence will in this scenario be obliged to eliminate double taxation implications.
The publication of these statements is helpful for practitioners active in the private equity environment, although there are still a number of open tax issues yet not discussed with or clarified by the Austrian Ministry of Finance in the aftermath of AIFMA’s introduction.