L AW in C O N T E X T Interactive Knowledge From Baker & McKenzie

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1 L AW in C O N T E X T Interactive Knowledge From Baker & McKenzie Austria Wealth Planning Country Training Summary The information set out in this Austria country training summary is designed solely for training with the use of the Private Banking Helpdesk and is current to July 18, The information in this Austria country training summary does not constitute legal advice. General Tax Issues & Tax Planning The Austria section of the Private Banking Helpdesk is authored by: Imke Gerdes LL.M., TEP Partner Baker & McKenzie, Vienna [email protected] Imke Gerdes LL.M., TEP is a local partner of the Vienna office of Baker & McKenzie which she joined in Imke is a law graduate of the Passau Law School and holds an LL.M. in International Tax Law from the Vienna School of Economics. In July 2007, Imke passed the Austrian Tax Advisor Exam (Steuerberaterprüfung). Imke has been a member of the Vienna and the Cologne bars since She is a registered with the Austrian Chamber of Tax Advisors as a tax advisor. Before joining Baker & McKenzie, Vienna Imke worked for the Austrian law firm, Kerres & Diwok. Imke s practice centers on tax law with a particular focus on international tax law. Tax Residence Definition. A person is considered to be resident if he or she has a domicile or habitual place of abode in Austria. It is irrelevant whether or not he or she is an Austrian citizen. Domicile means any place where an apartment/house is possessed in circumstances that indicate that the apartment/ house will be maintained and used. The latter condition has to be determined based on objective factors rather than the subjective intentions of the individual taxpayer. According to Sec. 26 of the BAO, the place of habitual abode is the place where the taxpayer is present in circumstances that indicate that he/she will stay at that place for a certain length of time and not simply temporarily. For purposes of residence tax liability, a stay in Austria in excess of six months is not regarded as temporary. The six-month period need not be within the same calendar year. If the period of actual presence in Austria exceeds six months, the individual s habitual abode in Austria will be deemed to have commenced at the beginning of the six-month period. If a citizen or resident of Austria terminates residency in Austria, an extension of his/her residency does not take place. A company is resident in Austria if it has its legal seat or its place of effective management in Austria. Taxation of Resident Individuals. Individuals who are resident in Austria are subject to Austrian income tax at progressive rates of up to 50% on their worldwide income ( residence taxation ). Dividend income and capital gains derived from securities, shares and similar instruments is taxed at a flat rate of 25%. Capital gains that form part of a business income as well as capital gains derived from speculative sales are subject to progressive rates. Certain capital gains, such as capital gains from the sale of real estate held for more than ten years are exempt from tax. Donations and legacies are generally not subject to income tax unless granted in a repetitive way.

2 Taxation of Non-Resident Individuals - Generally. Non-resident individuals are subject to Austrian tax on their income that is sourced in Austria, subject to reduction under an applicable treaty (hereinafter referred to non-residence taxation ). Non resident aliens are only taxed on their Austrian sourced income, provided this income is enumerated in Sec. 98 Austrian Income Tax Act (ITA). Currently, the following types of income are enumerated in Sec. 98 ITA: - income from domestic agriculture or forestry; - income from independent work exercised or enjoyed in Austria (also relating to former work and therefore, this also covers pension payments); - income from a business, if the business is exercised through a permanent establishment located in Austria, through a dependent agent or business that maintains real estate in Austria. A business activity relating to commercial or technical advisory services, seconding employees or an activity as a sports person or artist are also taxable in Austria if the respective person does not act through an Austrian permanent establishment or an Austrian dependent agent; - income from employment if exercised in Austria or on an Austrian ship; - investment income, if the income concerns dividends or similar income in the sense of Sec. 27 para 2 N 1 ITA or distributions received from private foundations and provided that the special tax at a rate of 25% had to be withheld at source; interest on loans if the loan liability is secured with Austrian real estate or real estate like rights or Austrian ships registered in an Austrian ship register; income in the sense of Sec. 27 para 2 N 4 ITA; income from real estate investment funds, if the real estate are located in Austria, and income from the sale of a participation in an Austrian company if the shareholder has held a participation of 1% or more in the past five years; - rental income, if the asset rented out is located in Austria, registered in an Austrian registry or used in an Austrian permanent establishment; and - gains triggered by speculative sales of Austrian real estate (any sale that occurs prior to the lapse of the 10 years period and 15 years period respectively). Unless the special tax at 25% applicable to investment income is applied, withholding tax of 20% applies to certain other types of income. Business Income. Business income derived by individuals is subject to progressive tax rates of up to 50%. Certain beneficial tax regimes exist for capital gains derived from the sale of an entire business, if certain conditions are met. Business income derived by a corporation is subject to corporate income tax at a rate of 25%. 2

3 Gift & Inheritance Taxation. Gift and inheritance tax was abolished as of August 1, 2008 and, therefore, neither gift nor inheritance tax is applied in Austria. Real estate transfer tax applies where Austrian real estate is transferred by way of a gift or bequest; the rate is 3.5% except in the case of transfers to certain close family members in which case the rate is 2%. Wealth Taxation. Austria does not levy wealth tax. Wealth Tax Planning. As there is no wealth tax in Austria, wealth tax planning is not an issue. Tax Treaties. Austria has entered into more than 80 double tax treaties concerning the avoidance of double taxation in the field of income tax, as well as a few inheritance and gift tax treaties. The latter does not have any significant meaning for the future anymore, as Austria does not levy gift or inheritance tax. The tax treaties signed by Austria generally follow the model convention of the Organization for Economic Co-operation & Development (OECD) and in line with the current model treaty Austria is renegotiating several treaties to implement the article of information exchange. Further, Austria has concluded Tax Information Exchange Agreements with Andorra, Monaco, Gibraltar and St. Vincent & The Grenadine. However, due to the pressure of the OECD and the G20, it can be expected that there are more to follow. Controlled Foreign Corporations. Austria does not have a specific CFC regime, apart from a shift from the exemption to the credit system in certain cases. If below mentioned conditions are fulfilled, dividends and capital gains are fully taxed on the level of the Austrian shareholder and any foreign tax levied is credited. A shift from the exemption to the credit method for dividends and capital gains received from qualified participations (shareholding of above 10%) takes place if tax avoidance or abuse of law may be assumed. Tax avoidance or abuse of law may, in particular, be assumed if the following conditions are fulfilled: - the focus of the non-resident subsidiary s business operations consists directly or indirectly in deriving interest income, income from the leasing of assets on the Austrian market or the sale of portfolio shareholdings (passive income); and - the tax rates or the taxable base in the country in which the non-resident subsidiary is resident are not comparable with Austrian taxation; foreign taxation is not comparable if it is 15% or less of the taxable base determined by Austrian tax law; a foreign average tax burden of 15% or less is not detrimental if it is caused by using special depreciation methods or carry-backs or carry-forwards of losses. 3

4 Leasing of assets in foreign markets is not considered to be a passive activity, provided the foreign company has own personnel and own premises. Further, the activities of a bank or credit institution are not considered passive activities. The mere holding activity of the foreign subsidiary is considered to be tax neutral, however, any passive activity of a sub-subsidiary taints the income of the subsidiary. Apart from the above mentioned anti abuse rule, dividends derived from EU/EEA portfolio participations (participation of 10% and less) are taxed at ordinary rates, if the foreign subsidiary is exempt from tax, not subject to a tax comparable with the Austrian corporate income tax or if the foreign tax is 10 percentage points less than the Austrian tax rate. Anti-Avoidance Rules. Austria, like many countries, sets out anti-avoidance (anti-abuse) rules in its domestic law that are designed to prevent taxpayers from avoiding tax via the misuse of legal arrangements. Tax Planning - Trusts. Austrian law does not recognize the trust relationship and there are no laws governing the treatment of a foreign trust from an Austrian perspective. However, where assets and/ or beneficiaries are located in a common law country, the use of trusts may be a feasible planning alternative. Tax Planning - Companies. Corporations are subject to corporate income tax at a tax rate of 25%. Dividends distributed to the shareholders are usually taxed at 25%, which have to be withheld by the distributing company. Exemptions or reliefs are available under applicable double tax treaties or where the shareholder is a domestic or EC corporation. Tax Planning - Partnerships. Partnerships are treated as transparent for income tax purposes and the profit of the partnership is taxed at the level of each individual partner. Austrian law knows partnerships that generate income from trade or business and those with income from the administration of assets (asset management company). To the latter certain tax exemptions for capital gains may apply. Tax Planning - Foundations. Contributions made by a settlor to an Austrian Private Foundation are subject to settlement tax based on the Act on Contributions to Private Foundations (Stiftungseingangssteuergesetz) at a flat rate of 2.5%. If the founder effects a contribution to a foreign private foundation or trust, which is not comparable with an Austrian Private Foundation, the entrance tax amounts to 25%. This increased entrance fee is also applied to contributions to an Austrian Private Foundation, if the documentation relating to the establishment of the Private Foundation has not been submitted to the tax authorities within the stipulated period. Contributions in the form of real estate are not subject to ordinary real estate transfer tax, but the entrance fee is increased by a real estate transfer tax equivalent at a rate of 3.5%. In such cases, the base tax rate of 2.5% is increased by 3.5% to 6% or 28.5% respectively. The 2.5%/25% entrance fee rate is also applied to subsequent contributions made by the grantor to a Private Foundation, as well as to supplementary contributions made by other persons who do not enjoy the status of grantor. 4

5 Charitable Planning. Austrian resident donors can fulfill their philanthropic intention through lifetime donations or legacies. Tax benefits are available where inheritances or gifts are made to qualifying charitable or religious institutions. A donor can either give to an existing charitable organisation or can set up an organisation on his own. Various forms of charitable organizations are recognized in Austria. Undeclared Funds & Tax Regularization. A taxpayer who has undeclared funds may have committed a crime according to the criminal fiscal act. In general, tax offences are laid down in the Austrian Criminal Fiscal Act (Finanzstrafgesetz FinStrG). In all cases the person committing the tax evasion can be anyone and it is not limited to the tax payer. Further, in all cases except for those offences committed negligently, the attempt to perpetrate is sufficient. Austria does not yet take an all crimes money laundering approach, though a change of the law implementing such provision is under discussion. Austrian law provides for statutes of limitation of generally five years, which commences at the end of the year in which the tax was due. In the event tax fraud is involved, the period of limitation is ten years. The respective period of limitation is prolonged by one year each time the tax authorities initiate their own actions to assess the tax. Filing the income tax return, for example, prolongs the statute of limitation by one year and a further prolongation by another year would be triggered if a tax audit was conducted. However, there is an absolute statute of limitation of ten years, after which the tax may no longer be assessed. Further, Austria and Switzerland have executed an agreement entering into force on January 1, 2013 under which funds Austrian residents have deposited on Swiss bank accounts will either be subject to a special one-time withholding tax, thereby rectifying any unpaid tax for the past in an anonymous way or the data of the tax payer will be passed on to the Austrian tax authorities in case the funds were fully taxed in Austria. Alternatively, the tax payer may also file a voluntary self-disclosure. The applicable tax rates under the agreement vary between 15% and 30%. Usually, the effective tax rate levied in the course of a voluntary self-disclosure will be below 15%. 5

6 Wealth Planning Issues & Techniques Foreign Investment. Austria welcomes inbound and outbound investment and does not place any limitations on either one. Political Risk. Austria is basically known as a stable democracy. However, latest changes to the tax law have shown that Austria is not always a secure place from a tax planning perspective. Currency & Exchange Controls. Minor exchange control obligations may apply if shares or funds are held abroad by an Austrian resident. In such circumstances, a reporting duty to the Austrian National Bank applies. An exemption is available where the value of the securities does not exceed certain thresholds. A separate reporting requirement applies to non-austrian situated cash accounts, which is triggered where the transaction volume exceeds a specific threshold. Succession Law. According to Austrian international succession law, the succession of an estate is subject to the law of the country the testator was a national at the time of death. This means that Austrian succession law would usually be applied to an Austrian national even if he or she has his/her habitual abode abroad. An Austrian national shall, consequently, not be able to establish a testamentary trust as it does not comply with Austrian succession law. There may be exceptions to this rule, for example, in the case of property located outside of Austria which is subject to special provisions in the country it is located. If neither a testament nor a contract of inheritance exists, legal succession takes place. Legal succession defines who will receive the inheritance and in which parts (statutory portion). According to the legal succession, certain relatives are qualified to obtain the inheritance. The succession takes place by stocks (parental), which means that any deceased statutory heir is represented for the purpose of succession by his descendants. Forced Heirship. Austria imposes forced heirship rules, which, to some extent, restrict testamentary freedom. Specifically, a compulsory portion (Pflichtteil) of the value of the inheritance is provided for persons entitled to a compulsory portion in the estate (Pflichtteilsberechtigte). Those entitled to the compulsory portion are the descendants (in absence of descendants, the ancestors) and the surviving spouse. The descendants and the surviving spouse receive a compulsory portion amounting to one-half (50%) of the value of the statutory portion (gesetzlicher Erbteil) in respect of the deceased s assets, ancestors obtain one-third of it. The spouse s compulsory portion is one-sixth if the deceased leaves children and one-third if the deceased leaves no children. Furthermore, the surviving spouse is entitled to stay in the marital domicile after the wife s or husband s death. Anyway, the property of the marital domicile may be given to a third party but the right of abode must be respected until the surviving spouse s death. The testator is entitled to reduce this compulsory portion to one-half provided that he or she has never enjoyed a family relationship with these persons, unless the testator has refused to have contact with them (e.g., visiting rights) without grounds. The testator may avoid this compulsory portion only by expressly disinheriting these persons for serious reasons. Section 768 ABGB enumerates such serious reasons (Enterbungsgründe), e.g., felonies committed against the testator, or leaving the testator in distress without assistance. 6

7 Forced Heirship Planning. The above mentioned clawback rules cannot be avoided by transferring assets to a trust or a Private Foundation, but under certain conditions the two years period can be started by giving assets to a Private Foundation or trust. Forced heirs enjoy special protection under Austrian law entitling them to increase their quota of the compulsory portion by reclaiming lifetime donations from donees (Schenkungsanrechnung). Some of the persons entitled to a compulsory portion, i.e., children and the surviving spouse, (not, however, parents), may setoff or clawback - lifetime donations given by the deceased to third parties or to other persons entitled to a compulsory portion (Sections 785 et. seq. ABGB). In case of a setoff the value of the lifetime donation will be added to the value of the estate and so increasing the quotas of the compulsory portions. The persons entitled to a setoff can thus claim the amount by which the compulsory portions are increased. Claims for setoff can only be lodged against third parties (i.e., parties that are not entitled to a compulsory portion), provided that the donation was made within the last two years prior to the death of the deceased. This rule, however, does not apply if the claim is directed against another person entitled to a compulsory portion, thus making it possible to even lodge claims with regards to donations that have been given more than two years before the death of the deceased. Wills. There are three bases for legacies: testament; contract of inheritance; or the law. As the Austrian Law is based on the doctrine of privity of contract (i.e., freedom of contract), it is first of all the privilege of the deceased to regulate his or her assets in form of testaments or contracts of inheritance. Should none of these last wills exist, the law determines inheritance. In general, the deceased, the heir and possible attesters have to fulfill certain personal requirements when making a Will. A holograph testament has to be written and signed by the deceased. If the testament is not holographic, the deceased and three attesters have to sign it. Additionally, the deceased has to declare to the attesters that the testament represents his or her last will. In certain cases of emergency some kind of emergency-testaments are possible. Official testaments can be set up with notaries and courts either oral or by handing over a document. A husband and wife have the opportunity to make a joint testament. A testament can be withdrawn at any time, e.g., by making a new one. Persons are entitled to dispute the testament if the abolition of the Will would be a benefit for them. A contract of inheritance is a bilateral binding legal transaction, which cannot be withdrawn single-handedly. It can only be concluded between husband and wife. A notarial recording is necessary. The contract of inheritance can dispose of up to three-fourths of the inheritance. 7

8 Asset Protection. Asset protection may be achieved by transferring the ownership to a private foundation, third persons or a legal entity. However, forced heirship rights may only be circumvented by such transfers in a limited way. Further, under certain conditions those transfers may be challenged in the event of a bankruptcy of the transferor. Use of Trusts. Austrian law does not recognize the trust relationship and there are no laws governing the treatment of a foreign trust from an Austrian perspective. However, depending on the goals of the settlor, a trust may nevertheless be a feasible vehicle. Usufruct. From a planning perspective, one way of transferring property, or at least the use thereof, from one generation to the next, is by means of a usufruct. The holder of a usufruct would, for example, be entitled to reside in the family home, but would not be the owner thereof. This right would often be given to a surviving spouse or children, and the property would, at the death of the holder of the usufruct, pass to other family members. Life Insurance Strategies. Life insurance can be a tax effective means of investing funds, as proceeds from certain life insurance products are tax exempt in Austria, if paid out in a lump sum payment. Proceeds from a life insurance policy are tax exempt, if at least one of the following conditions is met: (i) the life insurance contract provides for ongoing and constant premiums; or (ii) the life insurance contract provides for a term of 15 years or longer. The tax exemption applies to any of the following insurance products: (i) the proceeds are paid out while the policy holder still lives ( Erlebensversicherung ); or (ii) the proceeds are paid upon the repurchase of the aforementioned life insurance or upon the repurchase of an endowment insurance ( Er- und Ablebensversicherung ); or (iii) the proceeds are paid as a lump-sum settlement of or due to the repurchase of an annuity insurance, if the insurance contract provided for an annuity commencing earlier than ten years after the life insurance has been signed. A premium is considered to be an ongoing premium if it is paid at least annually. Note that where foreign insurance products are used, special care needs to be taken; broadly, such policies will not qualify for favorable tax treatment in Austria where, for example, there is insufficient risk. Business Succession. Where families own large and successful businesses, their intention might be to keep the business in the family. For this purpose, an Austrian Private Foundation has been largely used with members of the family being on the management board of the business. At the time Austria still had inheritance taxes, this model was also used to avoid hefty inheritance taxes to fall due. Nowadays, the use of a Private Foundation is more to avoid the business being sold. Use of Offshore Companies. Offshore companies, especially offshore private foundations (such as a Panama Foundation or Liechtenstein Foundation) might be suitable vehicles for asset protection and succession planning purposes. However, the general provisions under which an asset transfer may be challenged also apply where assets are transferred offshore. 8

9 Immigration & Expatriation Mobility Planning - Trailing Tax Residency/Domicile. Austria does not know the concept of trailing residency, however, a holiday home maintained in Austria by any person having the habitual abode outside of Austria for at least five years may result in residence taxation in Austria. The Austrian apartment or home results in the taxpayer being resident in Austria for tax purposes in the calendar years in which the taxpayer uses the apartment/house (alone or together with other apartments) for more than 70 days. To escape this rule, the taxpayer must keep records of the use of his or her Austrian apartment or house. The rules apply for the first time in the calendar year following the year in which the taxpayer moves his or her center of vital interests abroad and for the last time in the calendar year preceding the year in which the taxpayer moves his or her center of vital interests to Austria. Residence leading to residence tax liability in Austria, however, will be constituted if the taxpayer uses the Austrian domicile of his or her spouse who is subject to unlimited tax liability in Austria. Exit /Expatriation Taxation. An exit tax of 25% applies to all securities (shares, bonds, participations, investment funds and so on) held at the time of migration. If the taxpayer migrates to an EC country or an EEA country Austria has concluded an Agreement on Administrative Assistance with (currently only Norway), the tax payer may defer the exit tax due by filing a respective application. In this case, the tax falls due as soon as the tax payer either sells or otherwise alienates the asset or leaves the EC/EEA. Family Law Marital Property. Generally, under Austrian law the principle of separated property dominates the property rights between spouses during their marriage, unless they have agreed on community property by way of a pre-nup agreement. This means that each spouse remains owner of what he contributed to the marriage and of what he is earning during the time of the matrimony. Divorce. Assets which were intended for the use of both spouses during the marriage ( eheliches Gebrauchsvermögen ) and marital savings ( eheliche Ersparnisse ) have to be divided between the spouses in the case of a divorce. However, the applicability of this principle is restricted by case law in a way that only assets which have been accumulated as a consequence of efforts by both spouses are made subject to such division. The above mentioned principles on the division of assets intended for the use of both spouses and marital savings do not apply to goods which (i) have been contributed to the marital partnership by only one spouse, (ii) have been acquired by only one spouse by way of heritance or (iii) as a present by a third party. These exceptions specify the general principle that assets acquired without any efforts by one of the spouses are not subject to division in the case of a divorce. Imke Gerdes LL.M., TEP Partner Baker & McKenzie, Vienna [email protected] 9