On 29 October 2016, the Austrian Ministry of Finance provided interesting guidance on the tax consequences of an alienation of a participation in a Hungarian partnership by an Austrian partnership consisting of German partners.
The case revolved around an operative Austrian partnership (GmbH & Co KG) with German resident partners, with the Austrian partnership holding a participation in an operative Hungarian partnership.
From an Austrian point of view, partnerships are deemed to be transparent vehicles, meaning that capital gains emanating from the alienation are to be attributed to the German partners. The latter are entitled to the benefits under the double tax treaty between Austria and Germany. On the basis of arts. 7 and 23(1)(a) of said treaty, Austria has the sole taxation right for business profits, with Germany being obliged to exempt such income.
From a Hungarian point of view, partnerships are deemed to be non-transparent vehicles, meaning that capital gains are to be attributed to the Austrian partnership. Owing to the fact that under Austrian law, taxation takes place at the level of the (German) partners rather than at the level of the (Austrian) partnership, the double tax treaty between Austria and Hungary is not applicable (from an Austrian point of view) and can therefore not provide a shielding effect from Austrian taxation.
In this context, the Austrian Ministry of Finance stated that if the capital gains were not exempted from Hungarian taxation by virtue of the double tax treaty between Hungary and Germany, it would have to be determined whether Austria is obliged to exempt such income on the basis of the non-discrimination clause included in art. 24 of the double tax treaty between Austria and Germany. This clause requires Austria for purposes of taxation not to differentiate between the permanent establishment of a German enterprise and an Austrian enterprise. This means that insofar as Austrian partners are not subject to tax by virtue of the double tax treaty between Austria and Hungary, also German partners should be able to rely on the tax exemption.