AUSTRIA Law and Practice Contributed by: Clemens Philipp Schindler and Katharina Schindler, Schindler Attorneys
• Allocation of income to the settlor (transparency of the trust) – the settlor transfers assets to the fiduci - ary and determines the purpose in the course of the establishment of the trust. Thereby, the settlor loses legal ownership, while the fiduciary becomes the legal owner. In order to determine whether the income from the trust assets is to be attributed to the settlor, the trust documents and the factual practice have to be examined. In general, it will be the fiduciary who disposes of the source of income. However, this will be different if the settlor has far-reaching instruction (directive) rights vis-à- vis the fiduciary regarding the administration of the assets. An attribution to the settlor would definitely occur if the settlor, in addition to instruction rights, has the option to determine amounts to be distrib - uted and could revoke the trust; this would also be the case with comprehensive amendment rights of the settlor or if the settlor factually managed the trust assets. • Allocation of income to the beneficiaries (transpar - ency of the trust) – the income from the trust can be attributed to the beneficiaries under the con - ditions mentioned above (regarding the settlor). This would be the case with bare trusts, where the fiduciary acts on the instruction of the beneficiar - ies and has to transfer the assets to them upon request. The same applies if the settlor has exten - sive rights regarding the trust assets and these rights are transferred to the beneficiaries after the settlor’s death. • Allocation of income to the fiduciary (transpar - ency of the trust) – the fiduciary manages the trust assets separately (either physically or through accounting measures) from their own assets. An attribution of the income to the fiduciary is not permissible if they are fulfilling instructions given by the settlor and thus are not free to dispose of the source of income. Neither the success nor failure of the management will have an impact on the fiduciary. An attribution will only be possible in the exceptional case that the fiduciary violates their powers. • Allocation of income to no other person (non-trans - parency of the trust) – a trust should be qualified as a separate taxable (non-transparent) entity if the income cannot be attributed to a person (settlor, beneficiary or fiduciary). This is the case if neither
settlor, beneficiary nor trustee have comprehen - sive instruction and supervision rights regarding the management of the trust assets. The settlor, for example, has no such rights in the following structures: (a) a testamentary trust; (b) an inter vivos trust after the settlor passed away; and (c) a discretionary trust where they have trans - ferred the entire management to the fiduciary with full discretion and the beneficiaries are determined. Taxation of Individuals of a Trust Regarding distributions from foreign trusts to individu - als who are subject to unlimited income tax liability in Austria, the following two situations need to be dis - tinguished. • When the trust is qualified as a non-transparent foreign entity, no allocation of the trust’s income to the individual is necessary; rather, the individual is subject to tax only regarding distributions received from the trust. The tax rate would be 27.5% if the trust is comparable to an Austrian foundation; otherwise, the progressive tax rate of up to 55% would apply. • When the trust is qualified as a transparent foreign entity, the income of the trust is allocated to the individual from a tax perspective, regardless of received distributions; the individual will be subject to tax on the current income of the trust (eg, inter - est and dividends received by the trust are taxed at a rate of 27.5%). 3.4 Exercising Control Over Irrevocable Planning Vehicles Regarding Austrian private foundations, it should be noted that the legal options for a settlor or the ben - eficiaries to retain powers are restrictive. In particular, beneficiaries or their close relatives cannot be mem - bers of the foundation board, and reserved settlor’s rights such as the right to amend the foundation docu - ments or the right to revoke the private foundation cannot be passed on to beneficiaries. Such rights generally expire upon the death of the settlor.
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