The Austrian tax court has recently opined on the question of dividend payments from Austria to an intermediate EU holding company which has no substance (while its EU parent does).
Generally in Austria dividends paid out by Austrian corporations trigger a 27.5% withholding tax.
Nevertheless, pursuant to the EU Parent/Subsidiary Directive applied in Austria, outbound dividends are totally exempt from withholding tax if the
parent company fulfils the criteria as set out in the Directive and holds at least 10% of the share capital of its Austrian subsidiary for an
uninterrupted period of at least one year.
If the one year holding requirement is not met, withholding tax is due, but one can apply for a refund based on the fact that there is no abuse of law.
In the case at hand, the court was required to settle a dispute between Austrian Tax (which deemed tax payable) and a corporate taxpayer that employed a structure that entailed 40% of the shares of an Austrian company held by an intermediate Luxembourg holding company (LuxCo A). LuxCo A was, in turn, held by another Luxembourg holding company (LuxCo B), above which was an unincorporated fund domiciled in the Cayman Islands with mainly institutional investors from Australia, the USA and Canada.
While LuxCo A did not employ staff, LuxCo B employed three individuals (a managing director, an accountant and an office manager) and had its own business premises. LuxCo B additionally held participations in entities operating in the infrastructure sector in Germany, Poland, Mexico and Austria via several other intermediate holding companies.
LuxCo A received a dividend from the Austrian company for which Austrian withholding tax was retained since the minimum holding period of one year had not yet been reached.
After expiry of the one-year deadline. LuxCo A applied to Austrian Tax for a refund on the withholding tax. This was denied, which resulted in a case before the Austrian Federal Tax Court, which upheld the position of Austrian Tax.
The investors thereafter successfully appealed to the Austrian Supreme Administrative Court, which held that it suffices if economic activities are carried out not by the applicant itself (in our case LuxCo A), but by the EU-based parent company of the
applicant (LuxCo B).
Given the fact that there was sufficient substance within the EU, the non-EU entity behind the two-tier Luxembourg structure was not relevant to whether relief from withholding tax was permissible.
The decision of the Austrian Supreme Administrative Court is important for it helps to fill out the concept of the EU Parent/Subsidiary Directive, not only in Austria but is illustrative for other such cases in other EU jurisdictions.