Austria: Portfolio dividends

At the beginning of the year, the European Court of Justice (EJC) ruled in a matter referred to its attention that portfolio dividends, i.e. dividends derived from holdings of less than 10%, coming from countries of the EU and the European Economic Area (EEA) on the one hand and third countries, on the other, may not be treated differently. According to the EJC, portfolio dividends perceived from third countries are to be taxed by applying either the exemption method or the credit method.

The then applied Austrian legislation was therefore a violation of the free movement of capitals. Income derived from portfolio dividends of companies with the headquarters abroad had to be taxed in Austria. Fiscal exemption was granted only to holdings of a minimum entity of 10%. Income derived from dividends of companies with their headquarters in the EU and/or the EEA, on the contrary, where exempt from taxation irrespective of the entity of the holding in the company.

Following the ruling by the European Court of Justice, the Independent Fiscal Senate of Linz, called by a taxpayer to decide on this matter, had stated that, pending the issuance of new rules by the Austrian lawmakers in the framework of the Tax Amendment Law 2011, with regard to tax assessments prior to 2011, the method of the conditional exemption could be applied to portfolio dividends originating from third countries.

On 1st August 2011, the Tax Amendment Law 2011 was published. It establishes that the exemption method has to be applied to portfolio dividends coming from third countries with which Austria has stipulated an agreement on cooperation in administrative matters. This new rule will be applied to tax assessments starting in 2011.

After an appeal against the decision by the Independent Fiscal Senate of Linz, the Administrative Court ruled recently that up to the moment of the entry into force of the amendment introduced following the EJC’s sentence, the credit method has to be applied to portfolio dividends coming from third countries.

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