Tax-free capital gains, do they exist?

To track down tax-free capital gains, the relevant provisions of the Income Tax Act and Corporation Tax Act, as well as the Housing Promotion Act 1993, must be thoroughly examined. It should be noted in advance that the KESt exemption generally does not mean an exemption from income tax or corporation tax. A true tax exemption can only arise from a combination of KESt, income tax, and corporation tax exemptions. The following first briefly explains the individual exemption provisions and then illustrates the true exemption resulting from their combination.

Income tax exemptions under Section 27 (3) of the Income Tax Act

Distributions from profit-sharing certificates and shares are tax-free,
· if the acquisition costs are deductible as special expenses in accordance with § 18 para. 1 no. 4 of the Income Tax Act (EStG), or
· from medium-sized business financing companies within the meaning of § 5 item 14 KStG (Corporation Tax Act) from a holding up to a nominal value of no more than S 200,000,–.

Corporate tax exemptions pursuant to § 5 KStG

From the extensive catalogue of exemptions listed there, the following may be cited as examples:
Corporations serving charitable, public benefit, or ecclesiastical purposes; certain private foundations and the aforementioned medium-sized financing companies, etc.

Capital gains tax exemptions

This is a unique form of exemption and fundamentally does not mean an exemption from income tax or corporation tax. It is regulated in the following provisions:

· § 93 EStG
Only capital yields obtained in the domestic territory are subject to capital yield tax. This excludes foreign capital yields from capital yield tax liability, unless the coupon-paying entity for shares in foreign capital investment funds is located in the domestic territory.

· §§ 94 and 94a of the Income Tax Act (EStG)
Here are a few examples from the extensive liberation catalogue:
Capital gains from young shares and profit-sharing certificates (§ 27 para 3 EStG) as well as from debt securities of international financial institutions issued before 1 October 1992.
The declaration of exemption pursuant to § 94 Z 5, which can be issued by capital companies, merely has an administrative simplification effect and avoids the offsetting of capital gains tax against corporate tax. It is generally recommended to issue this declaration of exemption.

Housing Development Promotion Act 1993
In accordance with Section 2, investment income that is classified as income from capital assets (Section 27 of the Income Tax Act) (and therefore applies only to private assets) is exempt from capital gains tax and subject to final taxation to the extent of 4% of the nominal amount. This includes, in particular, residential bank bonds issued by banks.

Critical examination

Special edition arrangements
The tax exemption for 10 years, stipulated in § 27 in conjunction with § 18 ESt.

Housing development funding
With Federal Law No. 253/1999, an income tax relief measure was introduced outside the Income Tax Act, namely:
- As a special edition as outlined above (dead letter!)
- As capital gains tax exemption
One drawback is the long lock-in period of up to 15 years. The 4%-type capital gains tax exemption applies for the entire term, even without the deduction for special expenses.

SME financing
The prerequisites for tax relief are regulated by the ordinance BGBl No. 554/1994 to § 6b para. 2 KStG. There is an income tax exemption without KESt exemption. This means that the retained KESt is offset against income tax either through assessment or by refund via an application (Form L3). According to § 27 para. 3 item 3 EStG in conjunction with § 6b para. 3 KStG, the income tax exemption applies as long as the Federal Ministry of Finance certifies the existence of the prerequisites to the company and this certificate is published in the official gazette of the Wiener Zeitung.

Foreign capital gains
Inflows from foreign capital assets are subject to income tax for individuals with unlimited tax liability, even if they are exempt in the other state. Foreign capital income is only exempt from domestic tax liability if it is to be taxed in the state of residence on the basis of a double taxation agreement. However, a relevant intergovernmental agreement is circumvented in Austria by the regulation BGBl II 1998/43 as follows:
In the case of foreign investment income from debt securities received in Germany, tax must be withheld regardless of the provisions of the double taxation agreement if the total tax burden resulting from domestic and foreign withholding tax is less than 25%.
Withholding taxes retained abroad are generally creditable against domestic income tax.

Limited tax liability

Natural persons
Section 98 EStG exhaustively lists the income taxable in Germany. The following interest income is exempt from capital gains tax in Germany for foreigners if it is derived from bank deposits, debt securities, and private loans. However, the investor must prove their status as a foreigner to the coupon-paying entity.
Legal entities
Corporations that are subject to limited taxation under § 1(3) of the Corporate Tax Act (KStG) and those that are exempt under § 5 of the KStG are subject to limited tax liability within the meaning of § 21 of the KStG. Tax liability extends to income on which tax is levied by way of withholding (KESt).

Refund of capital gains tax in accordance with Section 97, Paragraph 4 of the Income Tax Act.

If the income tax rate falls below 25%, an application may be made for a credit or refund of capital gains tax. However, this is excluded to the extent that the sole earner allowance or child allowance is granted, as well as in the case of a tax-exempt gift in accordance with Section 15(1)(19) of the Inheritance Tax Act (ErbStG).

Full tax exemption for capital gains - overview

The existing complex of rules is so dense that a legal escape from capital gains tax liability is almost impossible. The sparse possibilities are as follows:

Charitable organisations
As these are exempt from corporate tax according to § 5 para. 6 KStG, they remain tax-free even with KESt-free securities. If they therefore manage to acquire debt securities from international financial institutions that were issued before 1 October 1992, they will achieve the optimal result of complete tax exemption. As confirmed by the BMF in the decree of 7 March 1989, AÖF 1989/142, for charitable associations, inter alia, dividend income within the meaning of § 10 KStG is also tax-free according to § 21 (2) KStG.

Non-residents
When proving the foreign status of natural and legal persons, interest income from fixed-interest bonds and bank deposits is exempt from capital gains tax. Since non-residents are neither subject to income tax nor corporation tax, this leads to a complete tax exemption. However, it should be noted that this capital income is taxable according to the regulations of the country of residence.

Tax resident
SME financing
Income from such securities is income tax-exempt up to a nominal value of S 200,000. The withholding tax on capital gains can be reclaimed in the tax assessment procedure or upon application.
Housing subsidies
Income from these securities is (partially) exempt from capital gains tax at a rate of 4% of the nominal value for the duration of the term.
Special edition benefit
Due to the marginal tax impact, this tax relief should be disregarded.
Building savings bonus
This is structured as an income (pay) tax refund in accordance with Section 108 of the Income Tax Act (EStG), but in practice has the effect of a capital gain amounting to currently 4.5% of the maximum contribution of 2 1,000 (S 13,760); it therefore amounts to S 619 per annum and is exempt from capital gains tax.

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