New Tax Regulations Affecting Foreign Investors

UniCredit Bank Austria AG
Summary: 
Foreign investors receiving interest income with source from Austria will be taxed differently as of 1 January 2015
Mon, 07/04/2014

 

The taxation of Austrian source interest income derived by foreign investors has been significantly revised through the Austrian Tax Amendment Act 2014, which was passed by the Austrian Upper and Lower House of Parliament.

 

Summary of the Changes

The new legislation significantly modifies the taxation of foreign investors by generally extending the Austrian limited tax liability to Austrian source interest income. The extension of limited tax liability is accompanied through a corresponding obligation for Austrian paying / depository agents to deduct Austrian withholding tax (Kapitalertragsteuer, KESt) in this respect. The new regulations will apply to interest earned / accrued after 31 December 2014.

Until now, interest income derived by foreign investors was not subject to limited tax liability in Austria and was correspondingly exempt from Austrian withholding tax. Consequently, in practice, interest payments made to foreign investors have been irrelevant for Austrian withholding tax purposes as long as Austrian paying / depository agents have been provided with proof of foreign residence by the respective foreign investor. In general, the distinction between Austrian source interest (Austrian debtor and payment via an Austrian paying / depository agent) and foreign source interest (foreign debtor and payment via an Austrian paying / depository agent) has practically been neglected.

In contrast to the previous Austrian tax regulations, Austrian paying / depositary agents will, starting from 1 January 2015, be in general obliged to deduct Austrian withholding tax from Austrian source interest payments made to investors that are not residents of Austria for tax purposes. The extended limited tax liability in Austria will be tied to the obligatory deduction of Austrian withholding tax. Interest payments made by foreign debtors and subsequently transferred to foreign investors via Austrian paying / depository agents (foreign source interest) will remain exempt from Austrian limited tax liability and Austrian withholding tax.

In summary, the new regulations will mainly affect foreign individual investors which are resident outside EU. Foreign corporate investors will presumably be entitled to (withholding) tax exemptions that presently already apply to Austrian corporate investors. Foreign credit institutions being the creditors of Austrian source interest will in general not be affected by the new regulations because interest payments between two credit institutions are explicitly exempted from Austrian withholding tax.

 

Impact on Foreign Credit Institutions

Until now, interest payments made by Austrian credit institutions to foreign credit institutions were not subject to limited tax liability in Austria and were correspondingly exempted from Austrian withholding tax because interest income derived by foreign investors was not subject to limited tax liability in Austria and also because interest payments between two credit institutions were explicitly exempted from Austrian withholding tax.

The Austrian withholding tax exemption for interest payments between two credit institutions has not been amended by the Austrian Tax Amendment Act 2014. The scope of this inter-banking exemption explicitly includes Austrian source interest provided that the creditor is an Austrian or a foreign credit institution. Consequently, also after 31 December 2014 (i.e. after the extension of the limited tax liability in Austria) foreign credit institutions will be exempt from Austrian withholding tax in this respect. The extended limited tax liability in Austria will be tied to the obligatory deduction of Austrian withholding tax and thus, foreign credit institutions will also not be subject to limited tax liability in Austria in this respect. This inter-banking exemption applies regardless of any possible exemptions which could apply to foreign corporate investors (as elaborated further below).

Therefore, Austrian credit institutions, which have previously refrained from deducting Austrian withholding tax on interest payments made to foreign credit institutions, will continue refraining from deducting Austrian withholding tax also after 2014.

 

Impact on Foreign Corporate Investors

Presently, certain Austrian withholding tax exemptions regarding interest payments are applicable to Austrian corporate investors. In order to apply these exemptions Austrian paying / depository agents in general rely on obtaining specific declarations adapted to each respective exemption.

Until now, interest income derived by foreign investors was not subject to limited tax liability in Austria and was correspondingly exempt from Austrian withholding tax. Consequently, it has not been subject to discussion whether these withholding tax exemptions would also apply to foreign corporate investors because foreign investors have been exempt from Austrian (withholding) taxation on interest payments in general.

As of 1 January 2015 foreign investors will generally be subject to limited tax liability in Austria regarding Austrian source interest payments. Consequently, recently there have been discussions on whether the Austrian withholding tax exemptions already available to Austrian corporate investors would also apply to foreign corporate investors. Although the Austrian tax authorities have not officially confirmed that these exemptions will also apply to foreign corporate investors, it is the prevailing opinion at present that these exemptions should also apply to foreign corporate investors.

The exemptions which could possibly apply to foreign corporate investors include:

  • exemptions for interest paid to (foreign) corporate investors provided a declaration that the interest income represents operating business income
  • exemptions for investment funds and real estate investment funds
  • exemptions for private foundations

 

Impact on Foreign Individual Private Investors

EU resident individual investors will in general not be affected by the new regulations as they are already subject to deduction of EU withholding tax or respectively exchange of information.

With respect to non EU resident individual investors, starting from 1 January 2015 Austrian depository / paying agents will in general be obliged to deduct Austrian withholding tax on Austrian source interest payments (especially from Austrian interest bearing securities, e.g. Austrian bonds and potentially Austrian source interest components distributed and deemed distributed via funds).