Developments in international tax law have many impacts. One of them affects the investment and real estate industry in particular: The relief for withholding tax (WHT) at source for dividend payments is increasingly dependent on the fulfillment of certain requirements.
1. International Investment and Real Estate Structures
The structure of international real estate investments often involves multiple holding company levels. The crucial tax issue for repatriation of profits is that the distribution of profits to the investment platform can be made without or with as little as possible WHT.
2. Exemption from Withholding Tax for Dividend Distributions
Local tax law usually imposes a withholding tax which is deducted from the distribution amount by the distributing company.
Especially the EU-Parent-Subsidiary Directive (EU-PSD) as well as Double Taxation Treaties (DTT) provide for relief from WHT. However, WHT relief is only possible if the beneficiary of the distribution can proof that the beneficiary is in fact entitled to the EU-PSD or DTT. This generally requires a certain degree of “substance” on the level of the beneficiary.
These substance requirements have further developed in terms of administrative practice and interpretation in recent years
Both OECD and EU administer tightened or new anti-abuse-provisions to determine if the beneficiary of dividend payments has sufficient “substance”.
4. Principal Purpose Test
The application of DTTs will depend on the Principal Purpose Test (PPT) which was included in a series of DTTs and will become effective soon due to the Multilateral Agreement:
- The PPT excludes the application of DTTs and thus the possibility of relief at soure for WHT if one of the main reasons of the structure is the obtainment of tax benefits of the DTT.
- The PPT is significantly more stringent compared to the existing Austrian anti-abuse provisions which accept the evidence of a substantial non-fiscal reason for the chosen structure.
- The (pure) economic reason for holding structures will have substantial importance in the future. This will be a big challenge for structures in which the holding company benefits from the application of DTTs but the shareholders behind or the ultimate owners would not be entitled to it.
5. Passing-through of distributions
For several years the OECD commentary to the model convention already has included a statement that companies which have only limited competences – similar to a trustee or mere administrator – and have the obligation to forward or pass-through the obtained income should benefit from treaty protection for this income.
In case of immediate or prompt forwarding of distributions, a treaty protection and withholding tax reduction is often tackled by local tax authorities, if it cannot be proven that there was no obligation for forwarding beforehand and that the functions of HoldCo exceed those of a mere administrator or passive holding company.
6. New Requirements for Substance from a Tax Point of View
Triggered by the anti-BEPS discussion, a number of countries (e.g. Luxembourg, Netherlands) have introduced specific provisions regarding the requirements for sufficient substance of holding or finance structures.
In light of the recent rejection of general anti-abuse provisions by the European Court of Justice – e.g. ECJ “Eqiom” regarding the French anti-abuse rule or ECJ “Deister” and “Juhler” regarding the German general suspicion of abuse – it remains to be seen whether the more specific requirements for substance, similar to the Austrian provision, are in line with EU law.
The Netherlands introduced for example the following criteria effective as of 1 January 2018:
- At least half of the decision-makers and managing directors of HoldCo have to be resident in the country of incorporation of HoldCo.
- The executive directors have to be adequately qualified for their functions and decision making process.
- HoldCo has to have appropriately qualified personnel which is necessary for the fulfilment of tasks and implementation of business of HoldCo.
- Management decisions are made in the country of incorporation of HoldCo.
- Essential bank accounts are hold in the country of incorporation of HoldCo.
- Accounting is performed in the country of incorporation of HoldCo.
- As of April 2018 even more criteria become relevant, in particular HoldCo has to show personnel costs of at least EUR 100.000 which have to be multiplied by a “Lebenshaltensindex” per country as well as office spaces in which business operations are verifiable performed.
7. Administrative Practice in Austria
For the relief at source for WHT on cross-border dividend payments a confirmation regarding the fulfilment of substance requirements is necessary. The requirements regarding substance are checked by forms with respect to existing personnel, office space and business activity (no mere asset management).
In recent years Austria exercised a more restrictive administrative practice:
- Certificates of residence are only accepted on Austrian forms.
- The form has to be available in its original version.
- The form ZS-EUMT, which is used for relief based on EU-PSD, has to be submitted to the fiscal authority
at the time of profit distribution according to the income tax guidelines.
If the requirements for substance cannot be proven at the time of distribution, withholding tax must be
deducted and a relief of WHT can only be obtained by filing a request refund. In the refund procedure,
the fulfilment of substance requirements is in detail checked by the Austrian tax authorities, in principle
comparable to the new requirements regarding substance in the Netherlands.
8. Take away: Implications for the Investment and Real Estate Industry
The design of holding structures should focus on the more precisely defined requirements for substance as
well as the “commercial drivers” and the economic reasons for a holding structure.
In existing structures, the fulfillment of both substance and formal requirements for treaty or directive
protection should be duly checked to avoid cost exposure at the level of PropCos and intermediary holding