EXEMPTION AT SOURCE: SUBSTANCE REQUIREMENTS WITH RESPECT TO HOLDING COMPANIES

In order for an exemption at source to be applicable for dividends distributions by an Austrian corporation to its foreign parent company based on the respective applicable tax treaty, certain requirements have to be met. The foreign recipient has to provide the distributing company with a Certificate of Residence issued by the foreign tax authority and a confirmation according to which it (1) is engaged in an active business that goes beyond the mere passive enjoyment of capital assets, (2) employs its own employees and (3) has its own business premises to carry out the business activities (substance criteria). Both the Certificate of Residence and the respective confirmations concerning the substance criteria have to provided on the Austrian form ZS-QU2.

In a recently issued so-called Express Answer Service (EAS 3429), the Austrian MoF offers highly insightful clarifications/statements concerning the above described substance criteria and the conditions under which the MoF believes these criteria to be met. The MoF’ statement addresses the following fact pattern: Two stock corporations resident in Switzerland hold a 99% interest in an Austrian stock corporation (AUT-Co): Swiss-A-Co, which is listed on the stock exchange, and Swiss-B-Co, which holds 1%, with Swiss-B-Co being wholly owned by Swiss-A-Co. Swiss-A-Co has no employees and uses the premises of another group company to carry out its business activities (business and group management as well as financing activities). The question was whether the Austrian AUT-Co, in the case of a distribution to the Swiss-A-Co, could exempt the income at source and distribute the dividend free of withholding tax on the basis of the DTA Austria-Switzerland.

Active business activity beyond the passive enjoyment of capital assets

In line with the recent Supreme Administrative Court case law (see VwGH 27.3.2019, Ro 2018/14/004), the MoF states that the assumption of business and group management functions as well as financing functions by a holding company constitutes an active business activity and hence goes beyond the mere passive enjoyment of capital assets. A predominance of active business activities is not required. However, the stock exchange listing alone does not in itself prove that the dividend recipient is engaged in an active business activity. As a result, the Express Answer Service underscores that holding companies are to be classified as engaged in an active business operation for purposes of WHT relief at source, provided that they perform specific management or financing functions, irrespective of whether these activities outweigh any other activities performed by the recipient.

Own employees and own business premises

According to the MoF’ EAS 3429, the term "own employees" within the meaning of the DTA Relief Regulation (‘DBA Entlastungs-Verordnung’) not only covers employees under a direct employment contract, but also leased employees (as already stated in EAS 2747), provided that they are integrated into the company's business operations like own employees and are subject to the company’s instructions. Therefore, it is not the legal but the factual/economic attribution of the employee to the dividend-receiving company that is decisive. The EAS also makes a similar clarification with regard to the criterion of “own premises”. Accordingly, the business premises required for the business activity do not have to be legally owned by the company, but can also be leased (e.g. from a group company).

In this specific case, however, the operating activities were completely outsourced to another group company. The employees and the business premises involved were therefore not attributable to the company receiving the dividend, but represented the labor force and premises of another company. According to the MoF’ EAS 3429, the receiving company in such a situation does not act in the capacity of the relevant decision maker with respect to the claimed active business activity. This activity including the therewith-connected employees and premises, hence, were not attributable to the parent company receiving the Austrian outbound-dividends. Accordingly, the necessary substance requirements were not met and a relief at source was not possible.

Conclusion:

The statements of the MoF in EAS 3429 underline that holding companies may fulfill the requirement of being engaged in activities beyond mere passive asset management, provided that they assume business and group management functions as well as financing functions. Moreover, it may suffice if the employees as well as the premises are leased. However, if the entire active operating activity is carried out by another group company, ie fully outsourced, the substance requirements are not met, as the relevant active business activity including the workforce and premises are not attributable to the dividend-receiving company.