INTERNATIONAL TAX PLAZA - CJEU rules in Case C-589/13 F.E. Familienprivatstiftung Eisenstadt (Free movement of capital – Interim taxation of capital gains and income from the disposal of holdings by a national foundation)

(September 17, 2015)

On September 17, 2015 the European Court of Justice (CJEU) ruled in Case C‑589/13 F.E. Familienprivatstiftung Eisenstadt (ECLI:EU:C:2015:612).

Is Article 56 EC to be interpreted as precluding a system for the taxation of capital gains and income from the disposal of holdings of an Austrian private foundation in the case where that system provides for a tax charge to be imposed on the foundation in the form of an ‘interim tax’ in order to ensure single national taxation only in the case where, on the basis of a double taxation convention, the recipient of gifts from the private foundation is exempt from capital gains tax which in principle is chargeable on gifts?

The dispute in the main proceedings and the question referred for a preliminary ruling

· In 2001 and 2002 the private foundation, which is established under Austrian law, received capital gains and income from the disposal of holdings falling under the scope of the first sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001. At the same time, the private foundation made gifts during those two years to a person residing in Belgium and another residing in Germany.

· In each of those two years, the private foundation withheld the capital gains tax at source at a rate of 25% to which the beneficiaries of those gifts were subject and transferred that amount to the Austrian tax authorities.

· However, both of the foreign beneficiaries subsequently requested the Austrian tax authorities to reimburse the capital gains tax charged on their gifts on the basis of the double taxation convention in force between the Republic of Austria and their State of residence. The beneficiary residing in Belgium made his requests with regard to 2001 and 2002 and obtained a full reimbursement of the Austrian capital gains tax that had been withheld at source on the gifts that he had received. The beneficiary residing in Germany made his request only for 2001 and also obtained a full reimbursement of the corresponding capital gains tax.

· In its tax return concerning corporation tax for 2001 and 2002, the private foundation reduced the amount of its capital gains and income derived from disposals of holdings that were in principle subject to ‘interim taxation’ under the first sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, by deducting the gifts made to those two beneficiaries from its taxable amount for both years. Since the amount of those gifts was greater that the capital gains and income from disposals, the private foundation declared a taxable amount of EUR 0, on the basis of which it should have been exempted from paying any tax.

· However, the Finanzamt (Finance Court) having jurisdiction in the case considered that to deduct the gifts made to the beneficiaries from its taxable amount was precluded by the first sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, since those beneficiaries had been exempted from capital gains tax under a double taxation convention. As a result, the tax authorities charged interim tax at a rate of 12.5% on the capital gains and income from holdings derived in 2001 and 2002 under Paragraph 22(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001.

· The private foundation appealed before the UFS against the decisions concerning the corporation tax of which it had been notified for 2001 and 2002.

· In the alternative, the private foundation claimed before the UFS that it should be granted a tax credit in the following years in the amount of the interim tax previously paid under Paragraph 24(5) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001.

· By decision of 10 June 2010, the UFS upheld the validity of the interim tax which had been levied on the private foundation at the then applicable rate of 12.5% of the taxable amount which had been not reduced by the gifts to the beneficiaries in Belgium and Germany in 2001 and to the beneficiary in Belgium in 2002.

· In upholding the position of the tax authorities, the UFS took the view that, with regard to those gifts, exemption from capital gains tax was granted on the basis of double taxation conventions, which meant that the gifts could not be deducted from the taxable amount of the interim tax.

· Nevertheless, the UFS partially upheld the private foundation’s plea in the alternative that it should be granted a tax credit a posteriori for the interim tax due in 2001, under Paragraph 24(5) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, in respect of corporation tax for the 2002 tax year. The UFS thus considered that the gifts made in 2002 to the beneficiary residing in Belgium entitled the private foundation to such a partial tax credit.

· The private foundation appealed against the decision of the UFS before the Verwaltungsgerichtshof (Administrative Court, Austria).

· The private foundation claims before the referring court that it is contrary to the free movement of capital under Article 56 EC to preclude gifts on which the beneficiaries have been exempted from capital gains tax on the basis of a double taxation convention from being deducted from the taxable amount for the purposes of calculating the interim tax, even if the UFS accepts that gifts of the same type made in subsequent years may give rise to an entitlement to tax credits.

· The referring court, which has already held that cross-border gifts by private foundations are movements of capital within the meaning of Article 56 EC, is of the view that it is very likely that to levy a tax on private foundations, which arises only in the case of gifts to foreign beneficiaries but not in the case of gifts to domestic beneficiaries, as the tax authorities and the UFS have decided to do in the case in the main proceedings, constitutes a restriction of the free movement of capital because it is likely to discourage similar cross-border arrangements whereas, in accordance with the principle of free movement, even a restriction of limited scope or minor importance is prohibited.

· The referring court states that assessing whether the restriction of the free movement of capital brought about by Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, is potentially justified is made more difficult by the fact that its purpose was never explained in the preparatory work leading to that law.

· The referring court explains in that regard that the system of interim taxation aimed to overcome two problems relating to the system of taxing resident private foundations. The first problem was related to the ability to reinvest free of corporation tax since capital gains and income from disposals of holdings were, until the end of 2000, not taxed. The second was related to the fact that in Austria gifts to beneficiaries residing abroad were not taxed, since only the Member State of the beneficiaries’ residence was entitled to tax those gifts under double taxation conventions.

· In the present case, the referring court is of the view that, where the interim tax must be paid even if a gift is made, the system of interim taxation serves to alleviate the consequences of the second of the problems of that system of taxation, namely the lack of taxation in Austria.

· In that regard, the referring court observes that the last sentence of Paragraph 13(3) of the KStG 1988, as amended by the Budgetbegleitgesetz 2001, merely mitigated the problem but did not resolve it entirely because private foundations are not taxed definitively, but are required to pay a tax — the interim tax — which, under Paragraph 24(5) of the KStG 1988, as amended, will be the subject of a tax credit and reimbursed in full at the latest when the foundation is dissolved. Until that tax credit is granted, the private foundation at issue will not be able to reduce its taxable amount through gifts to beneficiaries who are exempt from tax under a double taxation convention.

· The referring court does not rule out the possibility that such a restriction introduced by the national tax legislation may impair the free movement of capital referred to in Article 56 EC, but takes the view that the differences between the complex tax system on which it is required to give a ruling and similar cases examined in the relevant case-law of the Court of Justice are too great for that conclusion to be regarded as obvious.

· In those circumstances, the Verwaltungsgerichtshof has decided to stay proceedings and to refer the following question to the Court for a preliminary ruling:

“Is Article 56 EC to be interpreted as precluding a system for the taxation of capital gains and income from the disposal of holdings of an Austrian private foundation in the case where that system provides for a tax charge to be imposed on the foundation in the form of an ‘interim tax’ in order to ensure single national taxation only in the case where, on the basis of a double taxation convention, the recipient of gifts from the private foundation is exempt from capital gains tax which in principle is chargeable on gifts?”

The CJEU ruled as follows:

Article 56 EC must be interpreted as precluding tax legislation of a Member State, such as that at issue in the main proceedings under which, as regards interim tax which is charged on capital gains and income from the disposal of holdings of a resident private foundation, that foundation has the right to deduct from its taxable amount only gifts made in the course of a given assessment period that have been the subject of a tax levied within that period on the beneficiaries of those gifts in the Member State in which the foundation is taxed, whereas such a deduction is excluded by that national tax legislation where the beneficiaries reside in another Member State and are exempt, on the basis of a double taxation convention, from a tax that is otherwise charged on gifts in the Member State in which the foundation is taxed.

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