New York State Bar Association International Section

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1 New York State Bar Association International Section 2014 Annual Seasonal Meeting Vienna, Austria Program 23: Trusts in Civil Law Jurisdictions Friday, October 17 th, :45 pm - 5:00 pm COUNTRY REPORT AUSTRIA 1. The Austrian legal system does not provide for trusts. Austria is also not a member of the Hague Convention of Trusts. Instead of trusts, the Austrian law provides two other legal forms (i) the private foundation (Privatstiftung), which is a corporate structure established under the Act on Private Foundations and (ii) the fiduciary contract (Treuhand) according to sections 358 and 1002 of the General Civil Code. Neither of these two forms provides the benefits and flexibility of Anglo-American trusts. 2. Foreign trusts are scrutinised under Austrian civil law, according to the Austrian rules of conflict of laws. Section 10 of the Act on International Private Law, legal entities or any other structures of individuals or assets which are capable of having rights and duties, are subject to the law of the state of the actual seat of their main management. The reference to a foreign law is always a reference to the entire foreign legal system, including its rules of conflict of laws. If such rules refer back to Austrian law (revoi), Austria will accept the reference and then Austrian law will apply. 3. A different approach to foreign trusts is adopted by the Austrian tax law and revenue administration. The first question, which has to be resolved, is the determination of the nature of the foreign trust as a taxable subject. The first test is a comparison of the foreign trust or Page 1 of 5

2 structure with an Austrian foundation. The second test is the qualification of the foreign trust, as being opaque or transparent, discretionary or non-discretionary. 4. In order for a foreign trust to be comparable to an Austrian private foundation, the following criteria have to be scrutinised: the foreign legal basis, the articles and terms of the foreign structure, the purpose, the legal entity of the trust, the absence of ownership, the contribution of the assets by the settlor for a definite purpose, the independence of its governance, the determination of the beneficiaries, the limitation of liability to the assets of the trusts, and the absence of any business activity. 5. For purposes of comparing a foreign trust or another foreign structure to an Austrian private foundation, it is useful to draw up a table and compare the structural differences. If the outcome of the comparison is ambiguous, advice or advance ruling should be sought from the tax authorities. The example refers to a particular foreign trust but each case and each foreign trust has to be analysed on its own merits. Example: U.S. Trust Austrian Foundation Comparable? Asset ownership Trustee as fiduciary Foundation No Legal structure No legal entity Legal entity No Minimum capitalisation Liabilities to third parties None EUR 70,000 No Trustee Foundation No Creation By contract Notarial deed and No registration Registration in Company Register No Yes No Governance Liability of directors /trustees Trustee (physical or legal body) Strict liability Board of Directors, no Corporate Directors Violation of Directors duties No No Page 2 of 5

3 6. The Austrian private foundation is a corporate structure and as such is intransparent. As a result, the Austrian private foundation is a tax subject in its own right and neither settlor nor beneficiaries are taxed for income of the private foundation. This has also been accepted by foreign tax administrations and foreign court decisions, in particular by the Canadian Federal Court of Appeal in the case of Peter Sommerer vs. the Majesty the Queen, 2012 FCA 207. The practice of the IRS appears to be different, treating the Austrian private foundation as a transparent structure. I am not aware whether this had been challenged in any U.S. court as of yet. 7. The Austrian tax authorities scrutinise the issue of transparency of trusts and other foreign structures very closely. In relation to Anglo-American trusts, the tax authorities scrutinise each trust whether or not it is intransparent and a tax subject of its own. In the first instance, the powers of the settlor are reviewed in particular, whether the settlor has any legal or factual power of disposal over the income of the trust. If the settlor is able to revoke or to change the terms of the trust, the Austrian tax authorities would assume the existence of a right on part of the settlor over the assets or the income of the trust and, as a result, would consider the settlor as a tax subject. To be on the safe side, it is important to demonstrate that the trustee has an absolute discretionary power and is not dependent on the settlor for his or her instructions. Likewise, the trustee has to have absolute discretionary powers in respect to distribution to the beneficiaries. In the case that the trustee is dependent on the beneficiaries, their instructions or wishes, the Austrian tax authorities may consider the income of the trust as taxable on the level of the beneficiaries. Letters of wishes may, therefore, have a counterproductive effect. Clear terms in the trust settlement should always be preferred. 8. Depending on the outcome of the tests applied by the Austria tax authorities on the trust or foreign structure, the following different tax consequences may arise. 9. Distribution by an intransparent trust or foreign structure, comparable to an Austrian private foundation, and received by a beneficiary tax resident in Austria are subject to a 25% Austrian capital income tax. No further taxes will arise. 10. Distributions from an intransparent trust or a structure, NOT comparable to an Austrian private foundation, are considered as periodical income of the Austrian tax resident beneficiary. Such Page 3 of 5

4 income is subject to the normal personal income tax with top tax bracket of 50%. If the trust settlement does not provide for fixed regular distributions to the beneficiaries and the actual distribution is at the discretion of the trustee, such distributions become taxable only after a reasonable period of repeated distributions. The reasonable period may be up to 5 years. 11. Another interesting option for an intransparent trust or another foreign structure, not comparable to an Austrian private foundation, is the single distribution. If an Austrian tax resident beneficiary receives from such a structure a single distribution, there is no tax liability at all. It will be considered as a donation, which is tax free under Austrian law. Austria has no gift or inheritance taxes. The donation, however, has to be reported to the tax authorities within 3 months, which it is a matter of administrative control for avoidance of abuse. Tax exemption of a single distribution is also applicable in case the entire assets of a trust or the foreign structure are distributed to the beneficiary. 12. Tax exempt are also distributions from transparent trusts or foreign structures, as the beneficiary is subject to the taxation of the income of the transparent trust anyway. 13. When scrutinising trusts and similar foreign structures, there might be a risk that the Austrian tax authorities qualify the trust as a foreign investment fund. The definition of an investment fund under Austrian law is an economic one and not a legal construction. In Austria, foreign investment funds can be qualified as white or opaque funds depending on the transparency of their information reporting. This may lead to different tax rates applying to white or opaque foreign funds. Therefore, some common U.S. trusts warrant a closer review. 14. Grantor Retained Annuity Trust: in case the Austrian tax authorities would consider such trusts to be investment funds, they would be treated as being transparent, irrespective of their terms. As a result, the Austrian tax resident beneficiary would be taxed of any income accrued by the trust annually. The value of foreign investment funds are considered under Austrian tax law to increase 10% each year, no matter how they increase in reality. It is advisable to provide to the Austrian authorities detailed information on the income of the GRAT. To mitigate the tax situation and reporting requirements, it is advisable to present the GRAT to the Austrian tax authorities as a foreign transparent trust. Thereby, any further discussion about the qualification Page 4 of 5

5 of investment fund and taxable profit amounting to a 10% increase of the total value of the GRAT can be avoided. 15. Charitable Remainder Unitrust is in fact quite comparable to an Austrian private foundation. Donors who become tax residents in Austria will be advised to make sure that the CRUT is predominately comparable to an Austrian private foundation and as such non-transparent. The Austrian tax resident beneficiary will therefore be subject to a 25% capital income tax, with no further taxation in Austria. 16. Revocable Trusts: their purpose is to give up formal ownership. However, this does not in any way help with the Austrian tax authorities, as they will consider a revocable trust as transparent; since the trustee has retained their rights. The possibility of the revocation prohibits the final alienation of the trust settlement. As a transparent structure, the income of the revocable trust will be allocated for tax purposes, either to the settlor or the beneficiaries, depending on the circumstances. 17. In conclusion, professional advisors should review any U.S. trust or similar foreign structures carefully as to possible Austrian connections, not only as to the present state but also in respect to the possible heirs and beneficiaries who might all become residents in Austria. Likewise, U.S. citizens becoming residents in Austria should have their financial planning structures reviewed for any unexpected exposures. Irrespective of the relative high personal taxation in Austria, the good news is that Austria taxes on the basis of residence and not citizenship. Page 5 of 5