Euro Tax Flash from KPMG's EU Tax Centre

CJEU — Austria — Free movement of capital — Undertaking for collective investment in transferable securities (UCITS) — Legal form — Tax transparency of UCITS — Taxation of investment funds

On April 30, 2025, the Court of Justice of the European Union (CJEU or the Court) rendered its decision in case C-602/23.

The case concerned whether Austrian tax provisions that exclude non-resident investment entities — comparable to Undertakings for Collective Investment in Transferable Securities (UCITS, from dividend withholding tax refunds available to non-transparent legal entities constitute a restriction on the free movement of capital.

The Court held that the Austrian measures under dispute do not breach Article 63 of the Treaty on the Functioning of the European Union (TFEU), provided that the income generated by such entities is attributed to their unitholders and taxed at the unitholder level in the entity’s state of residence.

The plaintiff is a US-based investment company and one of seven series (independent sub-funds) of a trust established under Delaware law. Each sub-fund, including the plaintiff, is treated as a separate legal entity and is subject to taxation under US law. Income is attributed to unitholders upon distribution; if no distribution occurs, the income is attributed to the sub-fund itself. In such cases, the related federal corporate income tax can be reduced to zero, as the fund may claim the distribution against the tax due (subject to specific conditions). The plaintiff is a publicly traded fund open to the public that primarily invests in European shares and is subject to US financial supervision comparable to EU and Austrian prudential regulations. Moreover, the fund’s operations are, in all material respects, equivalent to those of an Undertaking for Collective Investment in Transferable Securities (UCITS) under Directive 2009/65/EC.

In 2013, the plaintiff received dividends from Austrian publicly traded companies, which were subsequently fully distributed to its unitholders, resulting in nil US federal corporate income tax liability for that year. However, the dividends were subject to a 25 percent Austrian dividend withholding tax. The plaintiff, acting in the name and on behalf of its unitholders, requested and received a 10 percent refund — calculated as the difference between the standard 25 percent Austrian withholding tax rate and the 15 percent rate provided under the double tax treaty concluded between Austria and the US.

Under paragraph 21 of the Austrian Corporate Income Tax Act (ACITA), legal entities residing in an EU Member State or EEA contracting state can apply for a refund of Austrian withholding tax if the tax cannot be credited in their residence state. In the specific case of domestic UCITS, based on the rules applicable at that time, such entities were treated as tax-transparent, with income attributed directly to the investors, who were themselves liable for tax (paragraph 186 of the Austrian Investment Fund Act — AIFA). Furthermore, paragraph 188 of the AIFA extended these provisions to foreign investment funds, regardless of their legal form.

The plaintiff argued that the refund provisions under paragraph 21 above should be extended to third-country entities pursuant to Article 63 of the TFEU. Accordingly, the fund applied in its own name for an additional refund of the remaining 10 percent dividend withholding tax. The Austrian tax authorities rejected the request, and after several rounds of litigation, the Austrian Supreme Administrative Court (the Supreme Court) ruled in 2021 that, in order to determine whether a refund is applicable, it is first necessary to conduct a ‘typological comparison’ to assess whether the plaintiff is comparable to an Austrian legal entity. The case was referred back to the Federal Finance Court, which carried out the required analysis and concluded that the plaintiff was indeed comparable to an Austrian legal entity and, as a result, the income had to be attributed to the legal entity itself. The court further held that Paragraph 188 of the AIFA — which precludes such attribution, constituted an unjustified restriction on the free movement of capital. The Austrian tax authorities disagreed with the typological comparison conducted by the Federal Finance Court and appealed the decision before the Supreme Court.

In 2023, the Supreme Court acknowledged that, under Austrian law, legal entities resident in an EU or EEA jurisdiction may apply for a refund if the income is attributed to the entity itself and not to its unitholders — therefore provided that the tax-transparency provisions extended by paragraph 188 of the AIFA to foreign investment funds do not apply. However, the Supreme Court was uncertain whether EU law requires the disapplication of Section 188 AIFA in the case of a foreign investment fund that: i) has legal personality and is subject to corporate income tax in its country of residence — and could thus be compared to regular Austrian legal entity, but ii) also shares the characteristics of a UCITS, which under Austrian law is tax-transparent and thus not eligible for a refund, since the income would be attributed to its unitholders. In light of the above, the Supreme Court referred the following three questions to the CJEU:

• Does Section 188 of the AIFA constitute a restriction on the free movement of capital under Article 63 TFEU?
• If a restriction exists, is there an objectively comparable situation between i) an Austrian legal entity that follows risk-spreading investment principles but is not a UCITS because it does not raise capital from the public and ii) a foreign investment fund that would constitute a UCITS under Austrian rules (due to public fundraising) but is not allowed to operate as a opaque legal entity?
• If such comparability exists, can the restriction be justified by the need to ensure a balanced allocation of taxing rights?

The CJEU recalled that a difference in the tax treatment of resident and non-resident collective investment undertakings could deter foreign funds from pursuing investments in that Member State and, consequently, could represent a restriction on the free movement of capital. Furthermore, under settled case-law, even legislation that applies without distinction to resident and non-resident operators, or a differentiation based on objective criteria can de facto disadvantage cross-border situations.

In the case under dispute, the Court acknowledged that the plaintiff sought a withholding tax refund under paragraph 21 of the ACITA, which might be precluded by the application of paragraph 188 AIFA.¹ If this paragraph were to apply, a non-resident entity — such as the plaintiff, would be treated under the same tax regime as a resident investment fund and would therefore not be eligible for a refund.

The CJEU then noted that, provided that the dividends received by the plaintiff are not taxed at a higher rate than dividends paid to an Austrian investment fund, this equal treatment would only amount to a restriction under Article 63 TFEU if the non-resident fund is not objectively comparable to resident investment funds but is instead comparable to a resident legal entity (that is opaque for tax purposes)².

Moving to the comparability analysis, the CJEU examined whether the fact that the plaintiff has a legal personality places it, under the measures under dispute, in a different situation from that of a resident investment fund and thus results in its situation that is not objectively comparable to that of a resident investment fund. In this context, the Court reiterated its settled case-law under which the comparability of a cross-border situation with a domestic situation should be assessed based on the objective pursued by the national legislation concerned and the purpose and content of the relevant provisions. Furthermore, only the relevant distinguishing criteria set out in the national legislation should be taken into account when assessing whether there is a different tax treatment related to a situation that is objectively comparable.

With respect to the objective of the rules under dispute, the Court noted that their aim is to prevent non-resident investment funds from creating a ‘shielding effect’, ensuring that taxation effectively takes place at the level of the unitholders. Considering this objective, and referring to settled case-law, the CJEU found that the Austrian rules do not necessarily place the plaintiff in a different situation from that of an investment fund that has a contractual form. This objective — taxation at the level of the investor, can also be achieved where a collective investment undertaking is established as a legal person but is either tax-exempt or fiscally transparent in its home jurisdiction. Accordingly, the mere fact that the plaintiff has a legal personality does not place the plaintiff in a different position, provided that the dividends it receives are attributed to and taxed at the level of its unitholders in its country of residence, rather than at the level of the fund itself.

According to the CJEU, it is for the referring court to determine whether the specific circumstances of the case meet the criteria above. Nevertheless, the CJEU provided guidance on this assessment, noting that the national court should consider two key facts. First, the plaintiff had distributed all of its income for the year 2013, thereby incurring no US federal corporate income tax liability. Second, the plaintiff benefited from a reduced Austrian withholding tax rate of 15 percent on behalf of its US-resident unitholders, which indicates that the Austrian tax authorities recognized those unitholders as the beneficial owners of the income.

In light of these considerations, the CJEU concluded that the Austrian legislation at issue — which prevents non-resident investment funds from obtaining a withholding tax refund, does not constitute a restriction on the free movement of capital under Article 63 TFEU, provided the income is attributed to the unitholders and taxed in the fund’s state of residence at the level of those unitholders, not the sub-fund itself.

Given its conclusions on the first and second questions, the Court held that it was not necessary to address the third question.

The CJEU decision is broadly in line with its previous case-law on the taxation of non-resident investment funds. The case reiterates the fact that, in light of the objective of avoiding double taxation, a collective investment undertaking has a legal personality does not necessarily place it in a different situation to that of a collective investment undertaking set up in a contractual form.

Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre or, as appropriate, your local KPMG tax advisor.