Tax equal treatment of foreign and domestic capital income from 1 April 2003

As a result of a total reform of the taxation of foreign capital income through the Budgetary Accompanying Law 2003, the discrimination against foreign capital income will be eliminated from 1 April 2003. As a specific crediting provision for foreign withholding taxes was not included in the law, a concrete regulation is now provided in the Regulation on foreign capital gains tax 29 August 2003.

Taxation of foreign income

As of 1 April 2003, the new regulations apply to foreign dividends, interest from foreign bank accounts, interest from foreign securities held in foreign custody accounts, and income from foreign funds.

Form of taxation

:: In the assessment procedure based on the tax return from 1 April 2003
Foreign capital gains are subject to a Special tax rate of 25 % during the transitional period until 31 March 2004.
:: In the direct debit procedure via the bank from 1 April 2004
When foreign capital gains are paid out through a domestic bank, the bank automatically collects withholding tax.

Crediting of foreign withholding tax

Pursuant to the Foreign KEST Regulation 2003 cited at the beginning, which came into force on 1 September 2003, withholding tax deducted abroad may only be credited up to 15 % of the investment income, meaning that if the foreign withholding tax is higher, 10 % KEST must be withheld in any event.
If the foreign withholding tax exceeds the maximum rate of 15 % provided for in the OECD Model Tax Convention, an application may be made for a tax refund of the excess amount; however, in the case of small amounts, this leads to a disproportionate administrative burden. This prohibitive rule therefore places a burden on these taxpayers.

Final taxation effect

The application of the special tax rate of 25% already produces the same effects of final taxation for the purposes of income tax and inheritance tax as the KEST deduction on domestic income.

Please note the retroactivity for previous years

Anyone wishing to benefit from final taxation from 1 April 2003 onwards must declare their foreign capital income in their 2003 income tax return and pay tax on it at the special rate of 25 %, taking into account any foreign withholding tax. However, if they have not declared this capital income in previous years, they run the risk of being asked by the tax office how they have dealt with the tax liability on this income in Austria to date. Although the future deduction of KEST by the bank from 1 April 2004 will be carried out anonymously and is, in principle, subject to banking secrecy – which, as is well known, offers only limited protection against the tax authorities –.

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