Refund of foreign withholding taxes on dividends

In practice, investors in foreign stocks are often subject to foreign withholding taxes in accordance with the national tax laws of the foreign source country. However, they are also subject to taxation in Austria based on their residence or habitual abode in Austria. This double taxation can generally be eliminated by crediting a portion of the foreign withholding tax against the Austrian tax and by applying for a refund abroad of the remaining, non-creditable portion of the foreign withholding tax. However, private investors generally must take the initiative themselves to obtain the refund.

Withholding and crediting of foreign withholding taxes

When foreign dividends are received by an Austrian private investor, the tax claims of various countries may conflict. To avoid a potential double taxation situation resulting from this, Austria has concluded bilateral treaties – known as double taxation treaties (DTTs) – with numerous countries. In most DTAs, a 15% withholding tax rate is agreed upon for the withholding tax on dividends by the foreign country of origin of the dividends. Austria thereby commits to crediting up to 15% of the foreign withholding tax against the domestic income tax liability.

If private investors hold foreign stocks in a domestic securities account, the bank automatically offsets the capital gains tax (KESt) by the amount of the withholding tax actually paid (up to a maximum of 15%). The KESt rate deducted from dividends, for example, is then not 27.5% but up to 12.5%, because up to 15% of foreign withholding taxes are credited against the domestic KESt (Foreign KESt Regulation).

In the case of a foreign securities account, the investment income must be reported on the individual investor’s income tax return and, after crediting the foreign withholding taxes up to the percentage specified in the relevant double taxation agreement (usually 15%), is subject to the special income tax rate of 27.5% in total. In the case of a tax assessment option, the progressive tax rate applies.

Refund procedure for non-creditable foreign withholding taxes

Abroad, a withholding tax rate higher than that agreed upon in the DTA is often levied, e.g., 26.375%, 35%, etc. Since Austria credits the foreign withholding tax only up to the agreed-upon percentage – usually 15% – any portion of the foreign withholding tax exceeding this amount is not taken into account. This portion can only be reclaimed by the individual investor abroad, based on the DTA, by filing a refund application with the foreign tax authority of the country of origin of the dividends.

The deadlines for a potential refund are often several years (2 to 5 years, depending on the country); the forms can usually be downloaded from the websites of the finance ministries of the foreign countries where withholding tax was withheld. Although the refund procedures vary depending on the country from which the refund is sought, the completed forms – along with the required supporting documents (e.g., tax statements showing the relevant information) – must generally first be sent by the individual investor to the tax office in their place of residence in Austria for the purpose of confirming their tax residency in Austria.

The refund applications, once confirmed by the Austrian tax office of residence, are then sent to the foreign tax authorities. In practice, filing refund claims in countries such as Germany or Switzerland (in part due to the shared language) is simpler; in many other countries, however, what is theoretically possible may prove more difficult in practice due to obstacles such as forms, follow-up inquiries, or communication in the respective official language.