Austria – Private Foundations Tax Issues 2018-12-03T14:25:23+00:00

Austrian Foundations

The private foundation (Privatstiftung)

The private foundation (Privatstiftung) is the civil law cousin of the common law trust.

A grantor must endow the Privatstiftung with assets of at least EUR 70,000 (at the time of writing) in the form of cash or in kind. If capital is raised as a contribution in kind, an audit is required.

Definition

An Austrian private foundation (“Privatstiftung”) is a legal entity, whose organisation and purpose is largely determined by the grantor, who provides the assets necessary to fulfil this aim. The private foundation is bound by the intentions of the grantor which are laid down in the declaration of establishment.

The legal framework of the private foundation is regulated in the Private Foundation Act “Privatstiftungsgesetz” (PSG) 1993. The Austrian private foundation is a legal person. Its structure is characterized by having no shareholder or proprietor but having beneficiaries instead. The foundation must be domiciled in Austria and entered into the Commercial register.  The private foundation may be established for any purpose, like the provisioning of the family (“family foundation”), the support of one or more enterprises or the support of art.  However, according to the Austrian Private Foundation Act, the private foundation is not allowed:

– to engage in commercial activities other than of a purely incidental character
– to be a personally liable partner of a general or limited partnership
– to have management functions of a commercial company.

The main advantages of a private foundation are

– high adaptation to individual requirements and needs
– maintenance of the assets for the following generation
– tax incentives
– avoidance of conflicts regarding the heritage

In Austria private foundations which meet certain criteria currently enjoy a number of fiscal advantages:

Tax on Transfer of Assets:

A capital transfer tax of 2.5% (plus 3.5% in the case of real estate) is payable on the value of assets transferred into a private foundation. This capital transfer tax rate is considerably less than the tax rates applied under the Austrian gift and inheritance laws which otherwise govern the transfer of assets by way of donation. (N.B. If the assets are not retained in the private foundation for a minimum period of 10 years than normal rates of gift or inheritance taxes are levied retrospectively).

Tax on Income Earned:

Private foundations are considered corporate entities for tax purposes and therefore subject to corporate income tax at the standard rate. However unlike other corporations they benefit from a number of fiscal advantages:

Dividend Income: Dividend income received by a private foundation on a shareholding held in a resident or non-resident corporate entity is exempted from corporate income tax in the hands of the private foundation. (In Austria dividend income received by a resident corporation from a non-resident corporation is only exempted from corporate income tax if certain strict criteria can be met with regard to percentage ownership of the company and the time that the shareholding has been owned). However, the international participation exemption for dividend income is only applicable in cases in which foreign withholding taxes have not been reduced under a tax treaty.

Interest Income and Capital Gains: Interest income from bank deposits, bonds or mutual funds as well as capital gains from the disposal of substantial shareholdings, i.e. 1% or more, are subject to a 25% tax rate. Such tax will be credited against withholding tax on distributions to beneficiaries. (In Austria capital gains are taxed as corporate income and resident corporate entities are not exempted from corporate income tax on the profitable disposal of shares in a resident entity).

Tax on Income Distributed:

Income distributed by the private foundation is currently subject to a final withholding tax of 25% whether the recipient is an individual or a corporation, and this may be reduced by tax treaties. Thereafter no taxes are payable by the recipient. If however the recipient is an individual with a lower marginal tax rate part of the withholding taxes may be re-claimed. Where the recipient is a corporate entity no reclaim can be made but taking into account the rate of corporate income tax and the fact that no more taxes will be levied on the income distributed, this fiscal treatment potentially represents a substantial fiscal concession.

N.B. A foundation is not allowed to carry on business, agricultural or forestry activities (except as side-line activities) nor to take over the management of or assume personal liability for a partnership.