The Austrian Ministry of Finance recently established that the conclusion of the amended double taxation treaty with Japan does not result in exit tax being triggered.
Under Austrian law, circumstances leading to a restriction of Austria's taxation right – regarding for example shares – vis-à-vis other countries are in general deemed to constitute a sale and trigger so-called exit tax. The tax basis amounts to the fair market value minus the acquisition costs; the tax rate is 27.5%. A restriction of Austria's taxation right may also occur in case a new double taxation treaty is concluded or an existing one is amended.
Currently, the double taxation treaty concluded between Austria and Japan ("DTT") provides that capital gains derived from the alienation of shares in a company resident in a treaty state (e.g., Austria) may also be taxed in that state (i.e., Austria), provided that the alienator holds at least 25% of the shares and has alienated at least 5% thereof, with the other state (i.e., Japan) being obliged to credit such tax. Consequently, in certain circumstances, Austria currently has the taxation right regarding capital gains arising from the sale of shares in an Austrian company.
Under the amended DTT between Austria and Japan (which is based on the OECD Model Convention), cross-border capital gains emanating from the alienation of shares in a company resident in a treaty state (e.g., Austria) – and not deriving at least 50% of their value directly or indirectly from immovable property there – shall only be taxable in the alienator's state of residence (i.e., Japan). Consequently, after entry into force of the amended DTT, Austria loses its taxation right regarding capital gains from the alienation of shares in an Austrian company (which then will only be taxable in Japan).
However, from an Austrian point of view, the conclusion of the amended DTT does not result in exit tax being triggered, as Austria's taxation right regarding hidden reserves is not being restricted. The reason for this is that Austria has declared that when a new double taxation treaty enters into force, Austria cannot be deprived of the right to tax the capital appreciation generated in Austria prior to the entry into force of such amended treaty. Consequently, Austria continues to be entitled to tax the hidden reserves accrued until the entry into force of the DTT with Japan, meaning that no restriction of taxation rights has occurred. At least under an Austrian interpretation, the amended provisions of the DTT concluded with Japan are applicable solely to hidden reserves arising after the entry into force of the treaty. Hidden reserves accumulated prior to the entry into force are not encompassed by the amended provision and therefore remain subject to unrestricted taxation in Austria.
Consequently, if an individual resident in Japan holds 100% of the shares in an Austrian company (the assets of which do not predominantly consist of Austrian real estate), the entry into force of the amended DTT with Japan per se will not trigger Austrian exit tax.