Austrian Federal Tax Court (BFG) decision: tax treatment of foreign exchange results relating to profit distributions

A few months ago, the BFG addressed in a decision (BFG 13/12/2024, RV/7100927/2020) the question of whether foreign exchange losses relating to dividend distributions from a shareholding, which is subject to the international participation exemption, are tax-deductible.

Underlying case

The decision was based on a case where an Austrian company held 90% of the shares in a Hungarian subsidiary. In 2016, a profit distribution was resolved. Due to an exchange rate depreciation of the HUF compared to the Euro, the actual payout was lower than the amount of the agreed dividend. The appellant claimed the resulting exchange rate loss as a business expense for tax purposes.

Decision of the BFG

The BFG ruled that such foreign exchange losses are tax-deductible because they are not directly economically connected to the tax-exempt income from shareholdings. These exchange rate losses arise from market developments and cannot be directly derived from the shareholding itself. Another key argument from the BFG is that the recipient of the dividend can freely manage the distribution claim from the time of realisation, thus having the opportunity to hedge against any exchange rate fluctuations. Therefore, in the BFG’s opinion, it becomes clear that the exchange rate losses occur independently from the income from shareholdings and thus must be treated as tax-effective. The exchange rate loss that occurs after the realisation of the dividend depends on the management of the foreign currency and is not causally related to the distributing company in a way that would be relevant for the definition of income from shareholdings.

Appeal to the Austrian Supreme Administrative Court (VwGH)

The tax deductibility of foreign exchange losses relating to dividend distributions remains a contentious issue, with differing evaluations in the literature.

Contrary to this BFG decision, the tax administration rejects the deductibility according to section 12 para. 2 Austrian Corporate Income Tax Act 1988 (KStG 1988) (see Austrian Corporate Income Tax Guidelines (KStR) margin note 1170). On the other hand, according to margin note 1170 of the KStR, foreign exchange gains from profit distributions are included in the tax exemption pursuant to section 10 KStG.

An appeal to the VwGH has been filed against the BFG decision.