Austria: Portfolio dividends

austria

The European Court of Justice has pronounced a ruling on two cases brought to its attention regarding the taxation of portfolio dividends, i.e. dividends from shareholdings of less than 10%.
While Austrian dividends are tax exempt, dividends derived from holdings in companies residing in third countries are currently tax exempt only if they reach the threshold of 10%. The European Court states that the obligation to pay taxes on portfolio dividends is a violation of European law.

The Austrian legislator must therefore provide for a fiscal relief of portfolio dividends derived from holdings in third countries. As to the method to apply in order to achieve this aim, the Court ruled that in principle it is possible to adopt the exemption method or the crediting method.
The Court explained furthermore that the requisite of mutual assistance in administrative matters by the competent authorities of the States in question, applied in Austria as a precondition for the exemption or the crediting method, is in line with European legislation. It is therefore predictable that the exemption and the crediting method will be applied only with reference to States with whom an exchange of information is possible.

Dividends derived from companies residing in the European economic space are currently tax exempt also if the respective holding is less than 10% provided mutual assistance in administrative matters and enforcement between the competent authorities is provided. This precondition is met only by Norway. The European Court of Justice ruled that the requirement of cooperation in the enforcement of decisions is contrary to European Union law.
When the conditions for the application of the crediting method to foreign dividends are met and the Austrian parent company records a loss in the year the dividend is paid, the losses are reduced by the amount of the dividends. Austrian law has therefore to make a provision for the possibility of carrying forward losses to subsequent years. The creditable foreign corporation tax may be carried forward to subsequent years and credited in years when profits are made.

The European Court of Justice, however, states explicitly that the carrying forward of credits for foreign withholding tax is not necessary from the point of view of European Union law. Therefore a change in the position of the Austrian Tax administration that also previously did not allow the crediting of withholding tax, is not to be expected.

The European Court of Justice has pronounced a ruling on two cases brought to its attention regarding the taxation of portfolio dividends, i.e. dividends from shareholdings of less than 10%.

While Austrian dividends are tax exempt, dividends derived from holdings in companies residing in third countries are currently tax exempt only if they reach the threshold of 10%. The European Court states that the obligation to pay taxes on portfolio dividends is a violation of European law.

The Austrian legislator must therefore provide for a fiscal relief of portfolio dividends derived from holdings in third countries. As to the method to apply in order to achieve this aim, the Court ruled that in principle it is possible to adopt the exemption method or the crediting method.

The Court explained furthermore that the requisite of mutual assistance in administrative matters by the competent authorities of the States in question, applied in Austria as a precondition for the exemption or the crediting method, is in line with European legislation. It is therefore predictable that the exemption and the crediting method will be applied only with reference to States with whom an exchange of information is possible.

Dividends derived from companies residing in the European economic space are currently tax exempt also if the respective holding is less than 10% provided mutual assistance in administrative matters and enforcement between the competent authorities is provided. This precondition is met only by Norway. The European Court of Justice ruled that the requirement of cooperation in the enforcement of decisions is contrary to European Union law.

When the conditions for the application of the crediting method to foreign dividends are met and the Austrian parent company records a loss in the year the dividend is paid, the losses are reduced by the amount of the dividends. Austrian law has therefore to make a provision for the possibility of carrying forward losses to subsequent years. The creditable foreign corporation tax may be carried forward to subsequent years and credited in years when profits are made.

The European Court of Justice, however, states explicitly that the carrying forward of credits for foreign withholding tax is not necessary from the point of view of European Union law. Therefore a change in the position of the Austrian Tax administration that also previously did not allow the crediting of withholding tax, is not to be expected.

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