TPA tax experts show with an intermediat holding company as example how a reduction of withholding tax for dividends can be seen.
Exempt a dividend distribution from Austrian withholding tax
The TPA newsletter of September 24, 2019 referred to the possibility to exempt a dividend distribution from Austrian withholding tax by applying the EU Parent-Subsidiary Directive. Inter alia, a tax relief in such cases is possible if the necessary substance requirements are met “indirectly” – for example at the level of the grand parent company.
|Please note: Based on an info provided by the Austrian Ministry of Finance (MoF) on January 7, 2020, this is not possible in the case of Double Tax Treaties (DTTs) vis-à-vis third country parties.|
Requirements for the reduction of withholding taxes according to a Double Tax Treaty
Under the DTT Relief Regulation (DBA-Entlastungsverordnung BGBl II 44/2006), a direct reduction of withholding taxes on profit distributions is possible if a DTT provides for a reduction of Austrian withholding taxes AND the documentation requirements of Sections 2 to 4 DTT Relief Regulation are met. These requirements are listed in form ZS-QU2 – which corresponds to the form that is relevant for EU cases, ZS-EUMT – and have to be confirmed by both the foreign dividend recipient and the foreign tax administration.
Intermediate holding company without employees or operational activity does not entitle to direct relief at source in DTT cases
Based on the Austrian MoF (EAS 3422; January 7, 2020), a reduction of the withholding tax at source is NOT possible if the parent company is merely an (asset-holding) holding or letterbox company. The underlying case referred to a US holding structure:
- The DTT Austria – USA grants a reduction of withholding taxes on dividends from 25% to 5% for participations of more than 10%.
- In the opinion of the Austrian MoF, the basic documentation requirements includes the declaration contained in form ZS-QU2 that the (direct) recipient of profit distribution is no mere holding company. If the parent does not fulfill this condition (e.g. because it does not employ any staff or has no premises at its disposal), no relief at source is possible but only a refund request can be filed.
- Substance at the level of the grandparent is not sufficient for a relief at source.
Conclusion on ‘Reduction of withholding tax’
Dividends to EU intermediate holding companies with an EU parent company can be reduced / relieved at source in case of a pure holding company, provided the grand parent company fulfills the substance requirements.
However, this does not apply to profit distributions for which a reduction of the withholding tax at source is to be carried out according to a DTT, i.e. a reduction / relief of withholding taxes is not applicable if the substance criteria is only fulfilled indirectly by an active grand parent company.
While this differentiation by the Austrian MoF is not fully understandable because of the congruent rules and requirements for EU cases, this procedure should be applied in order to avoid potential liability issues.