In its decision of 10.2.2016 on Ra 2014/15/0021, the VwGH confirmed the view of many lawyers and tax advisors that compulsory portion payments from a private foundation are generally not subject to capital gains tax.

According to the Supreme Court’s case law, assets transferred to the foundation have always been “relevant to the compulsory portion”, provided that the founder has reserved the right to revoke and/or comprehensively amend the assets before death. According to the new legal situation of the Inheritance Law Amendment Act 2015 (applicable to deaths from 01.01.2017), any dedication of assets to a private foundation (and also the granting of the position of beneficiary of a private foundation, insofar as the deceased has dedicated his or her assets to it) will in future be deemed to be an imputable gift.

Although compulsory portion payments from foundations do not constitute generous contributions from the private foundation to beneficiaries, but are made to settle statutory claims, the tax authorities assumed that they were subject to capital gains tax as a “contribution”. In its decision of 10.2.2016 on Ra 2014/15/0021, the VwGH had to rule on this issue, as there was no case law from the Administrative Court on the question of whether payments made by a private foundation to a person entitled to a compulsory portion, which are awarded to this person in the course of an action for a compulsory portion or a settlement concluded in this context, constitute a benefit within the meaning of Section 27 para. 1 no. 7 EStG 1988.

The VwGH recognized that there is no donation within the meaning of § 27 para. 1 no. 7 EStG 1988 and that it is not subject to capital gains tax insofar as it is rooted in the legal obligation of the private foundation to pay out the compulsory portion supplement claims. The VwGH has therefore rejected the view of the tax authorities and confirmed that payments of compulsory portions are not subject to capital gains tax.

However, the conclusion of a settlement must notprovidethe “opportunity to avoid tax liability on gratuitous, taxable donations made on the basis of the foundation’s purpose by subjecting them to the title of an allegedly existing legal obligation.” For example, by transferring assets on the basis of the settlement, the sum of which exceeds the statutory claim to a supplementary compulsory portion of the respective beneficiary.