Previously, based on the participation exemption and only in case of a participation of more than 10% and a detention period of at least one year, foreign dividends were tax exempt in Austria. On the other hand, dividends received from participations held in Austria were tax exempt without regard of their amount.
This rule has always been very controversial. In a ruling pronounced last April, the Administrative Court stated that failing to apply the participation exemption privilege (participation of more than 10%) in the case of participations of less than 10% held in a company owned by foreign capital represents and inadmissible restriction to the free movement of capital.
The ruling of the Administrative Court is the consequence of an appeal against a decision issued by the independent tax tribunal of Linz. Contrary to the argument put forward by the latter, the Administrative Court pointed out that not the exemption of the dividend income but the imputation of the withholding tax against the Austrian income tax represents the most appropriate manner of a tax relief. However, it is not clear whether this ruling has to be applied also to dividends coming from third countries.
The Ministry of Finance instead abides by its opinion that foreign dividends received from a participation of less than 10% have to be subject to the Austrian corporate income tax. However, in the event of dividends received from a participation of less that 10% held in the EU area, the corporate income tax and the withholding tax have to be imputed against the Austrian corporate income tax up to the general maximum amount which equals the corporate income tax to be paid in Austria for dividends.
According to the Ministry of Finance, the implementation of the ruling of the Administrative Court regarding the dividends received from participations of less than 10% held abroad has not to take place. Considering similar rulings of the European Court of Justice it seems unlikely that this opinion is compatible with the European rules in this field.