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The Austrian Private
Foundation
von Mag. Alexander Twardosz, LL.M. I.) Introduction and Definition II.) Grantor, Declaration of Establishment and Assets III.) Purpose and Beneficiaries IV.) Board of Trustees and Supervision V.) Duration, Revocation and Dissolution VI.) Tax Aspects of Establishment and Permanent Taxation VII.) Taxation of Distributions, of Revocation and of Dissolution
I.) Introduction and Definition The legal basis for the
Austrian private foundation is the Austrian Private Foundation Act
(Privatstiftungsgesetz, PSG), a special framework, that came into force in
1993. The main characteristics of the Private Foundation are to prevent
estates from being split up and to avoid inheritance and gift taxes when
property is transferred within the family. The private foundation
can be defined as legal entity, which has a legal personality. A difference
with a commercial company lies in the absence of owners. The persons who take
the place of owners especially when distributed profits are concerned are
called beneficiaries. The private foundation has its residence in Austria and
thus has to be entered in the Austrian register of firms. II.) Grantor, Declaration of Establishment and Assets The grantor is the
central authority of the foundation. The declaration of establishment is
drafted and designed to follow his wishes and intentions. The grantor can be
one (or several) natural or legal person(s) (§ 3 PSG). He even can reserve
the possibility to revoke the foundation as a whole, or to make changes to
the declaration. This very personal right has to be written down in a proviso
of the declaration as well, and cannot be transferred to a grantor´s legal
successor. The birth of a private
foundation is the entry of its declaration of establishment in the register
of firms. This act is only possible if the declaration contains certain
details determined by law (§ 9 Abs 2 PSG). In the declaration (which can also
be by last will (§ 8 PSG)), the grantor describes the legal destination of
his assets and the income from them and how they may find their way to the
chosen purpose (which are the beneficiaries). Thus, the declaration has to
include the aim of the foundation, its beneficiaries and the contribution of
assets to them. Finally, it has to include its duration. Other details, for
example regulations concerning executive bodies (the board of trustees, a
supervisory board, an auditor and so on) and conditions for a revocation or a
dissolution, may also be put into the declaration (§ 9 Abs 2 PSG). Since the grantor often
sets great value on discretion, all details mentioned, with the exception of
the name of the foundation and the minimum endowment (€ 70.000,00), can be
disclosed in a supplementary declaration. Only the entry of the less detailed
primary declaration into the register of firms is legally required. Though
the supplementary declaration has to be submitted to the tax authorities, the
grantor can be certain of secrecy due to the national fiscal confidentiality
(§ 48a BAO). According to the Private
Foundation Act (§ 4 PSG), the minimum amount of assets is € 70.000,00 (EUR
seventy thousand), contributed in cash (confirmed by a bank to be available)
or in the form of other assets (for example, business units). If others than
the initial grantor endow the foundation with assets, this donation will be
treated as a gift (with the tax consequences described below, [VI.]). III.) Purpose and Beneficiaries The purpose of a
foundation has to be laid down in its declaration of establishment. In
contrast to other forms of foundations in Austria, the specific private
foundation may not only have purposes of public, charitable or ecclesiastical
benefit, but also of solely personal interest. A common purpose for
instance would be regular payments to the grantor´s family members. Though
there is a wide range of legally allowed purposes of a private foundation,
there exist rather strict prohibitions on engaging in commercial activities.
Only commercial activities that are necessarily connected with the original
trusteeship are tolerated. Thus, the private foundation may not participate
in any form of partnership as a personally liable partner or be part of the
management of a company (§ 1 Abs 2 PSG). Exceptions are a participation in a
limited partnership or so-called atypical silent partnership, which is a
certain Austrian type of association. In the foundation´s
declaration of establishment the grouping of possible beneficiaries has to be
defined more or less precisely (§ 5 PSG). On the one hand, the grantor may
name a body authorized to determine the beneficiaries; on the other, the
single beneficiary may also be the grantor himself. The grantor has the right
to specify who the beneficiaries are. In case of the liquidation of the
private foundation (see below [VII.]), a final beneficiary has to be
chosen (§ 6 PSG). IV.) Board of Trustees and Supervision The law demands a board
of trustees to represent the institution (§ 17 PSG). This can either be named
by the grantor or by a body authorized by the grantor. The grantor can choose
a special trustee, other members of an existing board, or also a court of law
to name the same. The minimum size of the board is three members and the
grantor can be one of them if he is not a beneficiary himself (§ 15 PSG). No
member is simultaneously allowed to enjoy the status of a beneficiary or to
be closely related to one. The board is entitled to
remuneration by the foundation (§ 19 PSG), but the members are also
personally liable for damages occurring (§ 29 PSG). Once established, the
board is only subject to the terms of the foundation and is in no way
responsible to the grantor. However, the activities of the board are measured
by the purposes laid down in the declaration of establishment. Foundations
employing more than 300 persons are obliged to have a second (supervisory)
board additionally (§ 22 PSG). Nevertheless, other mechanisms of control
demanded by law also exist, such as an accountant to audit the books (§ 20
PSG) or the beneficiaries´ right to be informed by the foundation as to the
execution of its purpose (§ 30 PSG). V.) Duration, Revocation and Dissolution The duration of the
private foundation is also determined by its declaration of establishment.
The declaration can define a fixed period or a point of time after which the
foundation is to be dissolved. An indefinite term or the fulfilment of the
foundation´s aims or even other conditions can be taken as termination as
well. An automatic dissolution takes place after a period of 100 years, unless
the final beneficiary decides to extend the duration for one more maximum
period of 100 years (§ 35 PSG). A revocation of the
foundation is only possible if the grantor has provided for a corresponding
proviso in the declaration of establishment (§ 34 PSG). If the institution goes
bankrupt, has fulfilled its purposes or the given time has elapsed, it is
dissolved. The remaining assets are distributed to the final beneficiaries
and the fact of dissolution has to be entered into the register of firms (§
36 PSG). VI.) Tax Aspects of Establishment and Permanent Taxation The legal basis for the
initial charges is the Inheritance And Gift Tax Act (Erbschaft- und
Schenkungsteuergesetz, ErbStG). One great tax incentive is a flat rate of 2.5
percent inheritance or gift tax when the private foundation is endowed with
assets by its grantor. In the case of real estate contributions, the initial
tax rate increases to 6.5 percent. These flat tax rates are applied
to any endowment made by the original grantor, even to any subsequent
contributions, made after the establishment. As mentioned above [II.], any endowments made by others
than the initial grantor are taxed at the normal gift and inheritance tax
rates. These rates can rise up 60 percent, depending upon the amount and upon
whether family relations exist between the subsequent donor and the
beneficiary who stands in the farthest relation to him (§ 4 Abs 3 PSG). The amount of donated
real estate is valued at an assessed property value, whereas endowed business
assets are estimated at their going-concern value and other assets at a fair
market value (§ 19 ErbStG). The contribution of individual participations
generally leads to the disclosure of the hidden reserves, whereas in the case
of business contributed, no realization of the hidden reserves takes place
and the book value of the assets can be carried over. If assets are taken out
of the foundation within ten years, the difference between the initial 2.5 or
6.5 percent rate and the regular rate on gifts is charged. This rule does
neither apply to removals due to serious inducements, nor if only accruals to
the value are disposed of, nor if the assets are retransferred to the initial
grantor. Non-business assets or assets removed especially from business in
order to be endowed to the foundation are not rated at their actual value and
do not cause sales taxes or speculation yield taxes. In principle the profits
of a private foundation can be derived from all seven Austrian types of
income: agriculture and forestry, self-employment, business, employment,
capital assets, letting and leasing and a miscellaneous category. However, as
described above [III.], only exceptional cases of business income
are allowed. Thus, the private foundation is subject to corporate tax on its
world-wide income at the usual flat rate of 25 percent. Another great tax
incentive (beside the 2.5 and 6.5 percent rates on contributions to a
foundation) is the flat tax rate of 12.5 percent for capital income due to
the Austrian Corporate Tax Act (Körperschaftsteuergesetz, KStG). The tax paid
at the low rate of 12.5 percent is furthermore refunded later, when
distributions to beneficiaries are taxed (see below [VII.]) Therefore this low tax rate is
often seen as a motive to retain capital (received assets, dividends etc.)
for long periods in the foundation. A company distributing
dividends to a foundation has to withhold capital yield tax for
participations lower than 25 percent, but the foundation in turn is entitled
to a tax refund of the same amount. Capital assets from
direct investment, normally subject to capital yield tax at the rate of 25
percent, are also taxed at the flat rate of 12.5 percent as described above. In the case of a sale of
participations also the tax rate of 12.5 percent is applied, if this
participation exceeds a level of 1 percent in the corporation and furthermore
is a sale in the non-business area of the foundation. However, speculation
yield tax is charged if the participation is sold within one year after its
purchase. Allowances for special
expenses include the expenses for the foundation´s accountant or auditor,
losses carried-forward or certain gifts and other donations to charities as
museums or similar institutions. Any payments to
beneficiaries are not deductible from the institution´s income and only half
of the remuneration paid to members of the board of trustees can be deducted. Hidden reserves will be
disclosed and taxed only if operating business assets are distributed
separately. This is not the case if entire corporations or non-operating
business assets are distributed. VII.) Taxation of Distributions, of Revocation and of Dissolution On the one hand,
distributions to beneficiaries are tax exempt for the foundation and no gift
or inheritance tax is charged. On the other hand, these payments are treated
as the beneficiary´s income on capital. In this case the foundation is obliged
to withhold 25 percent capital yield tax, which in the case of a distribution
to a natural person is a final withholding tax. The tax at the rate of 12.5
percent paid before on capital income and in the case of a sale of
participations (see above [VI.]) is refunded simultaneously. However, distributions in
the form of assets other than cash (for example, intangible assets, shares of
a firm) are taxed at their "fictitious acquisition value" at the
date of their distribution, instead of the principle of the continuation of
the book value. In case of a revocation
of the foundation, the 2.5 (6.5) percent tax, initially charged on the
endowment, is refunded. The grantor, as the final beneficiary, is liable to
income tax or to corporate tax as the case may be, upon the increment-value
of the assets. The final dissolution as
well as the revocation of the private foundation and the distribution of all
assets to a final beneficiary, or to the grantor, are exempt from gift tax.
Hidden reserves are not taxable unless business shares are sold. However,
these distributions of assets are considered to be the final beneficiary´s
income on capital and thus are treated in the same way as dividend payments
in case of a distribution to a natural person. Distributions in the form of
other assets are again taxed at their "fictitious acquisition
value" as mentioned above. The Austrian private
foundation is a unique instrument to protect the value of estate, even over
generations. When only the income is used, the foundation prevents an estate
from being split up. In particular, the limited set-up expenses and the
generous tax exemptions for the private foundation´s income offer great
advantages for estate planners. |
