Erich Baier considers the Austrian Foundation as an international tax planning tool.
THE AUSTRIAN FOUNDATION is a corporate entity belonging to itself. It has no shares and has no shareholders. It comes into existence when the settlor or founder is making a gift and sets up the charter of the foundation, which must be signed in front of a notary as requested by Austrian law.
The founder can make the foundation irrevocable or revocable. If the founder or settlor is a corporate entity, a trust, an association or anything different froman individual such a founder does not have the right to revoke the foundation. This right is exclusively reserved for individuals.
The foundation is run by a board of directors, consisting of at least three individuals, two of whom have to be resident in Austria but need not be Austrians.
The charter of the foundation is public and rules general topics like the name of the foundation, its seat, whether it is revocable or irrevocable, and whether the settlor has foreseen the possibility to amend the charter of the foundation or not.
Important details like the names of the beneficiaries, the payments which have to be effected to the beneficiaries and the total amount of assets endowed to the foundation are included in the non-public by-laws.
The founder can denominate any beneficiary he thinks of and can, if he has provided for such a right in the charter of the foundation, denominate new beneficiaries whenever he chooses to do so. By being entitled to do so, he has not to obey certain regulations laid down in inheritance law and therefore can, under certain circumstances, legally avoid any forced heirship.
The founder or settlor also has to take care to denominate an ultimate beneficiary. This can be an individual or an institution who will receive all assets of the foundation if no other beneficiary is living or existing. This can be any person or any institution the settlor wants to become a beneficiary of the foundation. If such an ultimate beneficiary is not denominated by the founder the Austrian state will benefit from the proceeds and the assets held by the foundation as the ultimate beneficiary.
The management board
Structure of a foundation
The first management board is denominated by the settlor. Otherwise the court can denominate the board, but only if the settlor has not dictated a different regulation in the charter.
The board has to consist of at least three members – two of them should be resident in Austria but need not be Austrians. Beneficiaries as well as their relatives may not be members of the board.
The settlor himself is not excluded from the management board in the case where he is not a beneficiary of the foundation.
Nevertheless the settlor can constitute an advisory board which has the legal power to supervise the management board – to a certain extent this advisory board can even influence the activities of the management board. Beneficiaries can be members of the advisory board.
The role of the management board is obviously to manage the foundation. The board must follow the general guidelines given by the settlor to achieve the purpose, explained by the settlor’s declaration, of the foundation.
The supervisory board
A supervisory board is only compulsory if the foundation is a shareholder of a corporation that employs more than 300 individuals or the foundation itself has more than 300 employees. However, a supervisory board is always possible on a voluntary basis.
The annual accounts have to be audited by a certified public accountant. Furthermore, every member of the foundation’s boards can make an appeal at the court for an extra audit.
Since the settlor can give a general path of management in the charter of the foundation this additional corporate body, namely the advisory board, is opening the possibility for the settlor to have some influence on the foundation and being beneficiary at the same time.
Taxation of a foundation
The settlor has to endow assets or cash to the foundation to make this foundation come into existence. The minimum he has to endow is€70,000 either in cash or in kind (real estate, shares, etc).
If the endowment is not in cash proof must be provided that the fair market value of such assets endowed is at least €70,000.
The one-time tax burden of such an endowment, which civil law considered ‘a gift’ is a five per cent gift tax. If the endowment is real estate the gift tax is 8.5 per cent (but is not based on the fair market value but on the fiscal value which is approximately 40 per cent lower than the fair market value).
This gift tax is reimbursed to the settlor or founder in case he revokes the foundation.
Since the Austrian foundation is seen as a corporate entity the normal corporate income tax bracket, a flat rate of 25 per cent, is applicable to the income of the foundation. Nevertheless the Austrian Corporate Income Tax Act provides for material tax advantages and tax exemptions. These tax advantages are primarely focused on the capital investment income of the foundation and provides for the following tax benefits.
Domestic or foreign source interest income
Domestic or foreign source interest income is taxed at a flat rate of 12.5 per cent (interim taxation) and this tax will be reimbursed to the foundation if payments to beneficiaries are effected by the Austrian foundation.
Domestic or foreign source dividend income
Domestic dividend income is tax – free in the hands of the foundation. Foreign source dividend income achieved by the foundation is taxed at a flat rate of 25 per cent if the Austrian foundation is applying treaty protection for foreign withholding taxes. Therefore, if the Austrian foundation is holding shares in an Italian company and this Italian company pays a dividend to the Austrian foundation which is normally taxed at a flat rate of 25 per cent at source in Italy, the Austrian foundation does not need to pay any taxes in Austria. If the foundation now applies for treaty protection the withholding tax in Italy is reduced to 5 per cent and the Austrian foundation would have to pay 25 per cent corporate income tax with 5 per cent foreign tax credit.
This can easily be avoided by interposing an Austrian GmbH between the foundation and the Italian company. Dividends paid by the Italian company to the GmbH are tax exempt as are dividends paid from the GmbH to the foundation.
This regulation, laid down in the Austrian Corporate Income Tax Act, means that if there is no tax treaty existing between Austria and the other country the Austrian foundation does not have to pay taxes in Austria – and there are no tax treaties between Austria and Mauritius, Cayman Islands, Hong Kong, Vanuatu etc. The Austrian foundation, therefore, is an excellent tool for getting offshore income onshore legally and tax free.
Taxation at the end of the foundation
The foundation can end in two different ways. It is either dissolved (eg, in the case of insolvency) or the settlor revokes the foundation. Any assets retransferred from the foundation to the settlor are then due to a 25 per cent withholding tax.
What is different is the tax base. In the case of a dissolution the 25 per cent withholding tax is applied to the total amount of assets retransferred. In the case of a revocation only the increase of value is exposed to that 25 per cent withholding tax. In fact in the case of a revocation any assets endowed to the foundation can be deducted from the value of assets retransferred before applying the 25 per cent withholding tax.
Taxation of beneficiaries
Payments from a foundation to a beneficiary, resident in Austria and subject to unlimited tax liability, are generally subject to a 25 per cent withholding tax. Again the beneficiary can ask for an income tax assessment. Generally payments received from a foundation are due to 50 per cent of the normal income tax bracket applicable to such an amount of income.
If the beneficiary is a non-resident and is living in a treaty country automatically the treaty protection applies.
In more than 90 per cent of the treaties Austria does not have the right to levy any withholding tax on the payment of the Austrian foundation to the beneficiary. The right to tax is allocated to the country in which the non-resident beneficiary is living. Nonresident beneficiaries therefore can make major capital investments via an Austrian foundation tax-free. The Austrian foundation, being a corporate entity, fences off any capital investment income from the tax base of the beneficiary, the foundation itself is achieving this capital investment income tax-free and if revoked there is no withholding tax on the funds flowing back to the beneficiary. Furthermore, even the gift tax, levied upon the establishment of the foundation, is reimbursed.
The foundation comes into existence and is managed according to the rules of the law. Although the foundation is governed by the will of the settlor, the settlor can only draw the general path. The management board look after the day to day running of the foundation.
The Austrian Private Foundation Act states that the foundation has to have a management board and an auditor.
Erich Baier, MbA, LLM, (Int’l Tax Law), Certified Public Tax