In a decisive judgment rendered on 30 April 2025 in Finanzamt für Großbetriebe v. Franklin Mutual Series Funds – Franklin Mutual European Fund (C-602/23), the Court of Justice of the European Union (CJEU) provided clarity on the treatment of foreign investment funds under Austrian withholding tax law. This case presents pivotal developments for institutional investors engaged in cross-border dividend investments and sets an important precedent for the Austrian ‘Durchgriff’- the look-through approach.

Background and Legislative Framework

Austria imposes a 25% withholding tax on dividends distributed by Austrian companies. Under Austrian domestic legislation—specifically the Körperschaftsteuergesetz 1988 (KStG 1988) and the Investmentfondsgesetz 2011 (InvFG 2011)—a refund of the withholding tax is only available to resident entities or to entities “resident in a Member State of the European Union or in a State party to the Agreement on the European Economic Area with which extensive procedures for mutual assistance with regard to administrative matters and enforcement exist,” provided they apply for the refund and meet additional statutory requirements.

Crucially, under Austrian law, domestic investment funds qualifying under the EU UCITS (Undertakings for Collective Investment in Transferable Securities) directive and comparable foreign investment funds that meet the risk-spreading test are deemed tax transparent. This treatment determines whether the tax is attributed to the fund itself or to its underlying investors. If the fund is considered transparent, there is no entitlement to, nor a need for, a refund of withholding tax because the fund is not considered the taxpayer.

Franklin Mutual Series Funds, a Delaware-based investment trust with legal personality under U.S. law, sought a refund of Austrian withholding tax on the basis that it should be treated as tax-opaque and comparable to a domestic Austrian corporation, which is eligible for a refund.

Procedural History

The Austrian tax authority partially refunded the withholding tax by reducing the rate from 25% to 15% under the Austro-American Double Taxation Convention but rejected a full refund on the grounds that Franklin was not resident in the EU/EEA and was deemed tax-transparent under Austrian law.

Franklin appealed, asserting its status as a tax-opaque entity in the United States and sought to be treated analogously to an Austrian corporation. The Federal Finance Court initially rejected the claim. However, following an appeal, the Supreme Administrative Court directed a detailed comparability analysis, ultimately finding Franklin to be objectively comparable to a domestic limited liability company. This led to the matter being referred to the CJEU.

The Court’s Legal Reasoning

Objective Comparability and Tax Transparency

The core legal issue turned on whether Austria’s refusal to refund the remaining withholding tax infringed Article 63 of the Treaty on the Functioning of the European Union (TFEU), which prohibits restrictions on the free movement of capital.

The CJEU reiterated the usual test for restrictions, but ultimately found no restriction because:

• While Franklin had legal personality (unlike Austrian UCITS, which are portfolios of assets without legal personality), this difference was not dispositive.

• Franklin shared all essential economic characteristics with an Austrian UCITS: pooling of public capital, risk-spreading, regulatory oversight, and public reporting obligations.

• The fact that Franklin distributed at least 90% of its income, rendering it effectively tax-transparent under U.S. tax law, further aligned it with Austrian UCITS from a tax attribution perspective.

No Restriction on Capital Movement

The Court concluded that Austria's legal framework does not restrict capital movement under Article 63 TFEU, provided that:

• The income is attributed to the unit-holders and not the investment vehicle; and

• Taxation occurs at the unit-holder level in the state of residence (i.e., the U.S. in this case).

This outcome hinged on the principle that legal form alone does not override the economic and regulatory comparability required under EU law.

Key takeaways

The Franklin ruling underscores the increasing sophistication required in cross-border withholding tax litigation and recovery strategies. The key takeaways include:

• Substance over form: EU law prioritizes functional and economic equivalence over legal form, a significant development for foreign funds structured under non-EU legal regimes.

• Transparency presumption: The Court accepted Austria’s rule that UCITS-type funds, whether domestic or foreign, are looked through, provided their income is actually attributed to, and taxed in, the investors’ hands. The regime was found compatible with Art 63 in the circumstances of Franklin.

• Investor-level taxation: Relief from withholding tax may be contingent on taxation occurring at the unitholder level, not the fund level potentially complicating recovery for institutional funds acting on behalf of multiple investors. The Court noted that Franklin had distributed all of its 2013 income and therefore paid no federal corporate tax, reinforcing the parity with Austrian transparent funds.

Under Austrian law, only the ultimate taxpayers—the individual investors—can claim a refund when an entity is tax transparent. Since Franklin was not allowed to claim the refund in its own right (despite being a legal entity under U.S. law), and its U.S.-based investors would each have had to file for refunds individually, the practical result was that the economic burden remained on the fund. This classification blocked Franklin’s access to the remaining 15% of the withholding tax refund, even though it bore the tax burden and was treated as opaque in its home country.

In conclusion

For institutional investors and tax recovery service providers, the ruling highlights the need to consider both domestic tax qualification rules and cross-border comparability standards. In an increasingly global investment environment, the Franklin case stands as a cornerstone for advancing equitable tax treatment, reaffirming the EU's commitment to a uniform capital market without unjustifiable barriers.

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