In the ever-evolving landscape of tax legislation, Austria has taken a significant step by enacting new rules that affect the attribution of economic ownership of dividend income processed through central securities depositories. This change, effective from the 1st of July 2023, aligns the legal framework with market practices and addresses the challenges highlighted by the Supreme Court’s 2022 decision on withholding tax reclaims.
Understanding the Legislation
The new section 32(4) of the Income Tax Act sets out the criteria for economic ownership of dividend income. It stipulates that economic ownership is recognised upon the actual delivery of shares, specifically at the end of the record day, which is the first trading day when shares are traded without the entitlement to dividends.
For taxpayers, this means that to claim a full credit or refund of withholding tax, they must:
- Hold an economic risk in the shares, bearing at least 70% of the risk of a decline in value.
- Maintain continuous economic ownership of the shares through a minimum holding period. This minimum holding period is critical and is defined as 45 days, which can be achieved within a span of 45 days before or after the record day.
Implications for Taxpayers
Taxpayers must now navigate this minimum holding period, ensuring that they do not fall short of the 45-day requirement. If they do, the withholding tax will only be partially credited or refunded, specifically to the extent that no tax advantage is realised through the transfer.
Interestingly, the new rules offer an exemption for dividend income that does not exceed EUR 20,000 per assessment period, providing some relief for smaller investors or transactions.
Transitional Provisions
These new rules apply for dividend payments with a record day after the 30th of June 2023. However, if the record day falls before this date, the Supreme Court’s 2022 decision remains relevant. This decision is focused on the day before the Annual General Meeting, determining the resolution of the dividend as the crucial moment for the allocation of beneficial ownership.
The world of taxation is subject to continual change and Austria has recently introduced new legislation that alters the playing field for investors and taxpayers involved with dividend distributions. This pivotal legislation, which took effect on the 1st of July 2023, has been carefully crafted to close gaps and align with the realities of modern securities trading.
Detailed Criteria for Economic Ownership
Under the new legislation, economic ownership is connected to the actual delivery of shares. Importantly, the ‘record day’ now plays a central role in this determination. This is the day following the ex-dividend date when the shares are sold without the right to receive the declared dividend. To be considered the economic owner and thus eligible for a withholding tax credit or refund, the taxpayer must hold the shares at the end of the record day.
The Two-Fold Test for Taxpayers
The legislation introduces a two-fold test for investors seeking to claim withholding tax credits or refunds:
- Economic Risk: The investor must hold significant economic risk in the shares. This is quantified as at least a 70% risk of loss in value. This provision aims to ensure that the taxpayer has genuine skin in the game and is not merely engaging in transactions to claim tax benefits.
- Minimum Holding Period: The investor must maintain continuous economic ownership of the shares during the stipulated minimum holding period of 45 days. This period could be met either before or after the record day, offering some flexibility.
The introduction of these criteria serves to prevent ‘dividend stripping,’ where shares are bought just before the dividend date and sold immediately afterwards, solely to claim a tax advantage.
Exemptions and Special Provisions
The legislation is considerate of smaller transactions, exempting dividend income below EUR 20,000 per assessment period from the stringent requirements. This exemption is a relief for small investors and simplifies compliance for incidental income.
Transitional Rules
For dividends with a record day before the 1st of July 2023, the previous Supreme Court ruling stands. This ruling dictated that the crucial date for determining beneficial ownership was the day before the dividend was resolved at the Annual General Meeting. This transitional provision provides clarity and a smooth transition for taxpayers and investors.
Practical Implications
Investors must now review their investment strategies, especially those involving Austrian securities, to ensure they meet the new requirements. Tax planning will need to incorporate the new holding period and risk requirements to ensure eligibility for withholding tax refunds.
The Need for Diligence
The changes necessitate increased diligence from both domestic and international investors. It’s crucial for investors to track their investment timelines closely and document their risk exposure to meet the legislative requirements. Failure to comply with these new regulations could result in the denial of withholding tax reclaims, leading to unexpected tax liabilities.
Final Thoughts
Austria’s latest legislative update brings a new level of complexity to the investment landscape. While it aims to prevent abuse of the tax system, it also imposes additional compliance burdens on taxpayers. In this changing environment, staying informed and seeking professional tax advice is more crucial than ever. For those affected, understanding the nuances of these new rules will be key to ensuring compliance and optimising tax positions.
Investors and taxpayers should consider these new rules as part of their broader tax planning strategies and possibly seek adjustments in their investment approaches to align with the new regulatory environment in Austria.
Conclusion
Austria’s legislative update is a critical development for investors and taxpayers dealing with dividends from Austrian companies. It clarifies the requirements for economic ownership and withholding tax reclaim, aligning legal provisions with practical market operations.
For financial professionals and taxpayers, understanding these changes is essential to ensure compliance and optimise tax positions. As with any tax legislation, consulting with a tax professional is advisable to navigate the complexities and take full advantage of the available benefits.
