Clemens Hasenauer		Johannes Prinz

The Austrian ministry of finance has recently issued new guidelines on the tax treatment of securities lending and repo transactions.

Traditional tax treatment

According to the traditional Austrian tax administration practice, the sale of securities by a repo seller results in the transfer of economic ownership in the securities from the repo seller to the repo buyer, also where the parties have agreed upon a true repurchase agreement. Consequently, the repo buyer is considered the economic owner of the securities and the beneficial owner of the interest or dividends derived there from.

Similarly, securities lending transactions result in a transfer of legal and economic ownership to the borrower (although no capital gain is recognised for tax purposes). The borrower is also considered the beneficial owner of the interest or dividends derived from the borrowed securities.

Manufactured payments (payments made by the repo buyer or securities borrower to the repo seller or securities lender to put them in the position they would have been in if they had not sold or lent the securities) in general follow the tax treatment of the underlying interest and dividends.

Manufactured payments are, in general, tax deductible for the payer whereas the withholding tax treatment depends on the nature of the underlying payments (interest, domestic or foreign dividends) and the tax status of the repo seller or securities lender (resident or non resident status in particular).

New guidelines for short-term financing

Pursuant to new guidelines issued by the Austrian ministry of finance on December 17 2008 repo transactions which are entered for short-term financing purposes do not result in a transfer of economic ownership. Since the economic ownership in the securities remains with the repo seller neither the sale nor the resale should result in a capital gain. Consequently, the repo seller should also be considered the beneficial owner of the interest or dividends derived from the securities. When interest or dividends are received by the repo purchaser during the term of the repo, they should not be taxable for the repo purchaser.

A repo transaction may be classified as short-term financing if, in particular, the term is not longer than six months and the transaction value is below the current market value. However, whether a repo transaction is considered to be a short-term financing transaction will largely depend on the actual facts and circumstances of the transaction.

This new tax treatment also applies to securities lending transactions if they are entered for short-term financing purposes. In this case, the securities lender will remain the economic owner of the securities and the beneficial owner of the interest or dividends derived there from. Consequently, when interest or dividends are received during the term of such securities lending, they should be taxable for the lender and not for the borrower, irrespective of manufactured payments.

Clemens Hasenauer (clemens.hasenauer@chsh.at)
Johannes Prinz (johannes.prinz@chsh.at), Vienna