27 August 2019 – need2know
Despite the high number of decisions of the Austrian Supreme Court prohibiting the return of capital contributions, it was not decided until recently whether and under what conditions this concept could also be applied to constellations involving private foundations.
On 20 December 2018 the first supreme court decision (6 Ob 195/18x) on the prohibition of the return of capital contributions in respect of grants from a subisidiary of a private foundation to the foundation’s beneficiaries was issued.
Read the article (German) by our foundation expert Dr Verena Hügel-Karpeles
The prohibition of the return of capital contributions is one of the most heavily debated topics in the law of limited liability companies (Gesellschaft mit beschränkter Haftung) and public limited companies (Aktiengesellschaft). The prohibition of the return of capital contributions is based on Section 82 (1) Austrian Limited Liability Company Act (GmbHG) and Section 52 Austrian Stock Corporation Act (AktG) and causes a comprehensive binding of the funds of the company (and not only of the capital contributions!). For liabilities of a limited liability company, creditors can only rely on the assets of the company (and not the assets of the shareholders). In order to prevent the uncontrolled outflow of company assets to the shareholders, Austrian company law provides for comprehensive asset protection. As a result, it is very difficult for a shareholder of an Austrian limited liability company or public limited company to “retrieve” the capital once it has been invested.
It should be noted that Austrian law is particularly strict in this respect by international standards. Almost any transfer of funds from the company to a shareholder is inadmissible. Permitted exceptions are dividend payments to shareholder’s, payments made in return for consideration customary in arm’s length transactions and certain other exceptions provided by law.
Numerous decisions of the Austrian Supreme Court have already been made on the prohibition of the return of capital contributions. It is therefore all the more astonishing that the Supreme Court only recently, i.e. in its decision of 20 December 2018 (6 Ob 195/18x), dealt with the question of whether the prohibition of the return of capital contributions is also relevant to payments in constellations involving Austrian Private Foundations (Privatstiftungen).
Private foundations are no corporations. A private foundation has no owners and therefore no shareholders. It is an independent special fund – it belongs to itself. Assets are dedicated to a private foundation with the intention of permanently pursuing a specific purpose determined by the founder. The private foundation is liable for its liabilities with its assets. The beneficial owners of the private foundation are the beneficiaries. Whether the beneficiaries have enforceable claims to financial grants from the foundation depends, however, on the structure of the foundation and thus on the will of the founder. Moreover, beneficiaries have only a few legal rights of influence, such as the right to information, the right to appoint and dismiss board members and the right to dissolve the private foundation. By its very nature, the beneficiary‘s position is much weaker than that of a shareholder. The founder may, however, grant the beneficiaries rights that go beyond those provided by law. In fact, the position of a beneficiary can therefore be very strong. A beneficiary has no obligation to make a capital contribution – thus his position differs substantially from that of a shareholder of a limited liability company (or public limited company).
In the case decided, the beneficiary of a private foundation was granted a free right to use an apartment owned by a limited liability company (GmbH) in which the private foundation in turn had a stake. In addition, the beneficiary itself was a former shareholder of the GmbH, which owned the apartment.
The Supreme Court had to assess whether the granting of the right to use the apartment to the beneficiary by the GmbH violated the prohibition on the return of capital contributions. The Supreme Court confirmed this and justified its decision essentially with the former shareholder status of the beneficiary in the GmbH. The prohibition on the return of capital contribution also applies to former shareholders if the benefit was provided with regard to the former shareholder status.
In practice, this means that the prohibition on the return of capital contributions does not apply generally to de facto influential beneficiaries of a private foundation. Contributions to beneficiaries who previously held a shareholder position in a company transferred to the private foundation should, however, be carefully examined under the aspect of the return of capital contributions.
Read about this exciting decision in the essay by our foundation expert Dr. Verena Hügel, which appeared in the current issue of JEV (Journal für Erbrecht und Vermögensnachfolge).
The article by our foundation expert Dr Verena Hügel-Karpeles (German)
Questions? Please contact:
Dr. Verena Hügel-Karpeles
Private Client, Foundations
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