Over the last three decades of their existence, private foundations have seen many of their tax benefits adapted and restricted by the Austrian legislator, by judgments or by a change in the view of the Austrian tax authorities. This discontinuity is certainly one of the reasons for the current decline in the number of private foundations in Austria.
The Austrian legislator may consider the following tax-related recommendations to tackle existing systemic inconsistencies and help promote private foundations as an attractive legal form.
Consistency between the Foundation Input Tax Act and the Real Estate Transfer Tax Act
Aside from the registration fee under the Court Fees Act, the transfer of real estate also triggers real estate transfer tax and a special foundation input tax equivalent. The foundation input tax equivalent always amounts to 2.5 % and is based on the difference between the property's real value, as defined in the Real Estate Transfer Tax Act, and any consideration. However, donations in a form other than real estate are only subject to foundation income tax, which, based on Section 10(2) of the Valuation Act, is assessed on the fair market value. There is also an inconsistency in the case of mixed donations to a private foundation because, unlike the Real Estate Transfer Tax Act, the Foundation Input Tax Act does not foresee the division of a partially remunerated legal transaction into a remunerated and a gratuitous part. In order to tackle such inconsistencies, abolishing the special foundation input tax equivalent should be considered.
Removal of the cash method of accounting
Private foundations are obliged to prepare accounts. Therefore, they must use the claim-based approach for determining profit under the Austrian Business Code. For tax purposes, however, particularly for non-business-related operations, the cash method of accounting is relevant. As a result, private foundations are required to maintain both double-entry and cash accounts. Such reconciliation of accounts may lead to effort wasted in determining the actual time income was received and expenses were paid. Therefore, consideration should be given to the optional extension of the claim-based approach to the non-business area of private foundations.
Restriction of too broad definition of the term "contribution" in the Austrian Income Tax Act
Under the Austrian Income Tax Act, any type of contribution by non-charitable private foundations is subject to capital gains tax at a rate of 27.5 % or 24 % (23 % from 2024 onwards). This includes any gratuitous benefit granted by a private foundation to a recipient with the subjective intention of enrichment, which is not considered a tax-neutral payment of assets or a hidden contribution due to a shareholder position of the private foundation.
Therefore, donations to charitable institutions may generally fall under this definition of contributions as well. For such donations to be exempt from capital gains tax, however, either the exemption under Section 3 of the Austrian Income Tax Act must be applicable or the recipient of the donation must be listed as a charitable organisation under Section 4a of the Austrian Income Tax Act.
As an interim solution to promote smaller charitable institutions and individuals in need, the definition of a contribution within the meaning of Section 27(5)(7) of the Austrian Income Tax Act could be adapted for donations to third parties that serve charitable purposes. This would lead to an exemption from capital gains tax without creating tax deductibility. This approach would encourage charitable activities of private foundations.
Political discussions about fundamental extensions regarding the deductibility of donations are ongoing, but no specific legislation has been enacted yet.
Facilitated establishment of sub-foundations
The establishment of a sub-foundation, including the contributions to sub-foundations by the main private foundation, should be tax neutral. This would facilitate a frictionless division of assets between different lines within a family, allowing for smoother generational transitions in the future.
Identity-preserving change of legal form into a corporation
Currently, a private foundation can only disburse its assets by revocation, contributions or by establishing sub-foundations. Unlike the change of legal form to a comparable foreign legal form, private foundations cannot change to another comparable Austrian legal entity.
Many founders of private foundations have pooled their assets in a private foundation and would prefer a holding corporation despite the tax advantages of such a private foundation. If the legal form is changed, the private foundation would remain a corporation subject to unlimited taxation according to the Austrian Corporate Income Tax Act, without applying the special provisions relating to private foundations.