The Austrian Private Foundation

Originally, the intent of the legislator was to offer an Austrian wealth management vehicle and to thereby prevent capital from being moved to foreign structures, notably to foundations established in nearby Liechtenstein. Currently over 3,000 private foundations exist in Austria, with an estimated total wealth of approximately EUR70 billion (64 per cent of which is held through companies and 24 per cent through real estate). 80 of Austria's 100 largest companies are controlled by private foundations, with a total of around 400,000 jobs indirectly depending on private foundations. Most private foundations were founded in the year 2000 (approximately 800); since then the number being established has decreased. Many wealthy Austrian families have set up private foundations, with the list of the largest private foundations in Austria being almost identical to the list of the richest Austrians.

Definition

The Austrian private foundation (i) is a legal entity without owners, members or shareholders; (ii) is established through a declaration of intent by the founder under private law (rather than under public law); (iii) is endowed with assets by the founder (either at establishment or at a later point in time); (iv) serves a legally valid purpose determined by the founder; (v) is not allowed to carry out a commercial activity exceeding a merely ancillary activity nor to be a general partner of a registered partnership; (v) is represented in its dealings through a board of directors; and (vi) is registered with the commercial register, as a result of which it comes into legal existence.

Purposes

Austrian private foundations can be used for many purposes, including the following: (i) for holding wealth and supporting the members of a family; (ii) for estate planning (e.g., in order to prevent the fragmentation of shares in an incorporated family business due to successive cases of inheritance); (iii) for asset protection (e.g., in order to keep assets out of reach of creditors or spouses in the event of divorce); (iv) for the avoidance of inheritance tax (however this is no longer relevant in Austria since 1 August 2008, when such tax was abolished); and (v) for charitable purposes (e.g., in order to operate a museum).

Deed Of Foundation

A private foundation can be set up by one or more founders, who can be individuals or legal entities. For this, the founders have to sign a deed of foundation in the form of a notarial deed. This has to contain (i) the assets to be endowed to the private foundation (at least EUR70,000); (ii) the purpose of the private foundation; (iii) the body which determines the beneficiaries (e.g., the board of directors); (iv) the name of the private foundation (which must contain the wording "Privatstiftung"); (v) the legal seat of the private foundation (which must be in Austria); (vi) the names, postal addresses and dates of birth (in case of individuals) or registration numbers (in case of legal entities) of the founders; and (vii) the term of the private foundation (which may be limited or unlimited). Certain rights of the founder have to be contained in the deed of foundation in order to be valid, such as the right to amend the deed of foundation, the right to revoke the private foundation, as well as the admissibility of setting up a supplementary deed of foundation.

Supplementary Deed Of Foundation

In practice, the founder of a private foundation will always reserve the right to set up a supplementary deed of foundation. Since the latter does not need to be disclosed to the commercial register, details of a more private nature are usually regulated therein. Typically, it will contain (i) detailed provisions regarding the determination of the beneficiaries and the distributions to them; (ii) further endowments to be made by the founder to the private foundation exceeding the minimum endowment of EUR70,000; and (iii) the fees to be paid to the members of the various bodies of the private foundation. The supplementary deed may be signed by the holder of a power of attorney or by a nominee acting for the founder.

Endowment Of Assets

As mentioned above, assets in a value amounting at least to EUR70,000 must be endowed by the founder to the private foundation. In the case that there are several founders, it is not necessary that every founder contributes the same amount. Often, when a private foundation is set up, minors contribute a nominal amount (e.g., EUR1,000), in order for them to acquire the status of a founder, which enables them to exercise the rights associated therewith. In practice, it does not make sense to set up a private foundation with assets of less than EUR5 million. Assets endowed may consist in cash or in kind. In the latter case, an audit will be necessary to determine the value. After the establishment of a private foundation, subsequent endowments by the founder are still possible. Also, it is possible for non-founders to make endowments; however, this does not result in these persons thus becoming founders.

Registration

Once the deed of foundation and the supplementary deed of foundation, if included, have been signed, the first board of directors must apply for registration of the private foundation in the commercial register.

Taxation

Gratuitous transfers of assets to a private law foundation are subject to foundation transfer tax. Both assets gratuitously transferred at the time of establishment of the private law foundation as well as such transferred at a later point in time are subject to this tax. The tax rate in general amounts to 2.5 per cent of the endowment. Exemptions apply, for instance in respect of real estate.

Private foundations are generally subject to corporate income tax in Austria at a rate of 25 per cent, based on their worldwide income, and are taxed as normal limited liability companies. However, some special rules apply. As a consequence, most types of dividends received are tax-exempt; in addition, (i) interest; (ii) capital gains on shares and bonds; and (iii) capital gains from real estate are subject to a so-called interim tax of 25 per cent which can be refunded under certain circumstances. Also, a private foundation may rely on double taxation treaties concluded by Austria in order to achieve a reduction of withholding tax in source countries.

Distributions of any kind (i.e., cash, other assets or the possibility to use property of the private foundation) by the private foundation to a beneficiary are subject to a withholding tax of 27.5 per cent, with such tax having the effect of final taxation in case of individuals. However, distributions of substance are not subject to withholding tax. If a double taxation treaty concluded between Austria and the state of residence of the beneficiary conforming to the OECD Model Convention is applicable, then Austria should normally not be allowed to tax.

Conclusion

Foundations serve similar purposes in civil law countries as trusts do in common law countries; and the private foundation has seen much success for both Austrian and non-Austrian clients since its introduction nearly 30 years ago.

Dr. Niklas J.R.M. Schmidt, TEP CBP
Niklas is a partner at the firm, specialising in tax and private client work. His publications include three books on Austrian tax, as well as numerous articles in Austrian and international tax journals. In addition, he is the author of the German language introductory book "Kryptowährungen und Blockchains" (2019) and a co-editor of "Taxation of Crypto Assets" (2020), which covers the taxation of crypto assets in about 40 countries over nearly 800 pages. Niklas has been named one of Austria's top ten tax lawyers by an Austrian magazine and is ranked in band #1 by Chambers, Legal500 and other renowned directories. He has worked for several years at a "Big Four" accounting firm and has held the post of research assistant in the department of tax law of the University of Vienna.