I. Case Overview

Company A is an investment firm established under the Delaware Statutory Trust Act in the United States. It consists of several independent sub-funds, each with its own legal entity status. Company A holds various equity investments in Austria. In 2013 and 2014, Company A received dividends from Austrian companies and initially paid a 25% withholding tax under Austrian domestic law. Later, Company A applied for a reduced tax rate under the Austria-US Tax Treaty, which capped the withholding tax at 15%, and received a partial refund from the tax authorities. At the end of 2014, Company A filed another application to recover the remaining taxes, citing Article 21(1a) of the Austrian Corporate Income Tax Act of 1988. The tax authorities rejected this application, and Company A appealed to the Austrian Federal Tax Court (FTC). In 2016, the FTC dismissed the appeal. In 2021, the Austrian Supreme Administrative Court (SAC) sent the case back to the FTC for reconsideration. This time, the FTC disagreed with the tax authorities’ position and ordered them to refund the part of the withholding tax that was not refunded in 2013, but it did not approve the refund for 2014.

In summary, Company A first paid a 25% withholding tax on dividends received in 2013 and 2014. Then, it successfully applied for a 10% refund under the Austria-US Tax Treaty. Later, Company A sought a further refund of the remaining 15% withholding tax based on the EU principle of free movement of capital. The court approved the refund for 2013 but denied it for 2014.

II. Key Point of Dispute

The tax authorities argued that, under the Austrian Investment Fund Act of 2011, Company A was considered a tax-transparent entity. This meant the investment income should be attributed to the fund holders rather than Company A itself, making Company A ineligible for a refund. Company A contended that there was substantial evidence showing it is a U.S. corporate entity and a taxpayer for corporate income tax purposes, and therefore, it should not be treated as a transparent entity. The SAC noted that if Company A is indeed a taxable entity but is denied a refund because the Austrian tax authorities deem it tax-transparent, this would impede the free movement of capital and violate Article 63 of the Treaty on the Functioning of the European Union (TFEU), which ensures the free movement of capital.

The SAC suggested that determining whether Company A should be treated as a taxable entity under Austrian tax law should involve comparing it to similar Austrian entities (using an analogy method). The key to this method is to first assess Company A’s legal status in the U.S. and compare it with the closest equivalent Austrian company. If, after this comparison, Company A is deemed a taxable entity under Austrian law, the next step is to determine whether the dividend income can be attributed to Company A. If the analogy shows that Company A is comparable to an Austrian entity and that the dividends can be attributed to Company A, then it becomes relevant whether the Investment Fund Act of 2011 applies. Upon comparison, evidence indicated that Company A’s legal status in the U.S. is similar to that of an Austrian corporate entity, and that Company A had legal and economic ownership of the dividends, meaning it had control over them and the dividend income should be attributed to it. If the tax authorities consider Company A tax-transparent under the Investment Fund Act of 2011, while the comparable Austrian entity is not, this discriminatory treatment restricts the free movement of capital and breaches Article 63 of the TFEU. Unless there are justified reasons for such a restriction, the application of the Investment Fund Act of 2011 should be limited.

The tax authorities provided the following reasoning to justify the restriction on the free movement of capital: First, Company A is not a typical U.S. company but a statutory trust under Delaware law, so comparing it to an Austrian corporate entity is inappropriate. Second, denying the refund ensures the consistency of the tax system. In the U.S., Company A can choose to distribute at least 90% of its profits (excluding realized gains) to shareholders to qualify for tax-exempt status. Using this distribution strategy, Company A’s federal income tax for 2013 and 2014 was zero. If the withholding tax is refunded, it would be difficult to ensure consistent taxation at the shareholder and corporate levels for dividends earned from Austria. For Austrian shareholders, dividends are subject to withholding tax. Therefore, refusing the refund maintains the consistency of the tax system.

During the retrial, the FTC did not agree with the tax authorities’ arguments. First, as an investment company, Company A holds sub-funds besides its fixed capital, which aligns with its business model and does not prevent comparison with domestic corporate entities. Second, the Austrian companies invested in by Company A had paid corporate taxes locally. When Company A distributes fund income to its shareholders, withholding tax is also required under U.S. tax law. Refunding the withholding tax on dividends would prevent double taxation at the investor level. If no refund is made, Company A, having a zero federal income tax rate, cannot credit the withholding tax on dividends. Since Company A’s shareholders are not taxpayers for the Austrian dividend withholding tax, they also cannot credit the tax, resulting in economic double taxation, thus hindering the free movement of capital. Furthermore, the exemption for Company A’s income at the corporate level in the U.S. is to prevent double taxation, as shareholders are taxed on dividends or profits. There is no abusive arrangement here. Therefore, the restriction on the free movement of capital is not justified.

III.Final Ruling

After the retrial, the FTC confirmed that Company A was eligible for a refund and ordered the tax authorities to refund the withholding tax paid by Company A in 2013 at the treaty rate. However, for 2014 and later years, under the revised Austrian law, foreign funds are considered transparent entities, so the withholding tax previously paid could not be refunded.

IV. Insights for International Businesses

The free movement of capital is one of the EU’s “four fundamental freedoms” (alongside the free movement of goods, services, and people) and a key element of the EU single market. Article 63(1) of the TFEU states, “All restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.” The principle of free movement of capital applies not only within the EU but also between EU and non-EU countries. It is the only fundamental freedom that explicitly covers non-EU countries. In this case, the Austrian court, based on the principle of free movement of capital, ruled that the tax authorities must refund the withholding tax, offering new perspectives and references for Chinese companies investing in the EU on how to better protect their tax rights.

Understand and Properly Apply the EU Principle of Free Movement of Capital: While taxation remains within the legislative authority of EU member states, Article 63 of the TFEU stipulates that applying domestic tax laws should not lead to discrimination or hidden restrictions on the free movement of capital. The court’s ruling in this case also shows the efforts of European courts to use case law to interpret the principle of free movement of capital and eliminate tax barriers to capital movement. It is important for Chinese companies investing abroad to enhance their understanding of the EU’s principle of free movement of capital and fully leverage this principle to maximize tax benefits. It is advisable for such companies to understand and apply this principle properly, and more related cases should be compiled for reference.

Austrian Federal Tax Court Recognizes the Comparison Between Foreign Fund Companies and Domestic Austrian Companies: The court regards foreign funds as equivalent to Austrian companies, which may affect the tax treatment that foreign fund companies receive when they obtain dividends in Austria for 2013 and earlier. Chinese companies facing similar situations can use legal channels to safeguard their tax interests.

Stay Updated with the Latest Tax Laws of Relevant Countries (Regions) and Correctly Apply Treaty Provisions: For example, under the latest Austrian regulations, foreign shareholders can directly apply for a reduced withholding tax rate on dividends under the treaty, rather than paying first and then requesting a refund. Chinese companies should closely monitor changes in tax systems and the validity of tax incentives in the countries (regions) where they invest and stay informed about the updates and implementation of tax treaties.