1 1. INTRODUCTION The fiscal privileges enjoyed by private foundations in Austria have recently become a topic of heated discussion once again. When Austria abolished the estate and gift tax, the ques- tion was raised of what was to be done about the capital transfer tax of 5% payable on the value of assets transferred into a private foundation and which was designed as a flat-rate estate and gift tax. Upon the Austrian government’s declaration that it intended to maintain this tax, donors turned to the public and claimed that in comparison to other taxpayers, they suffered tax dis- crimination. In response, the Austrian government decided to permit offsetting of the capital transfer tax against the corporate tax payable by the foundation. This was an unprecedented decision in Austrian tax history: that taxes which had been rightfully paid should be refunded. Moreover, in many cases, the payment of this tax had resulted in tax exemption of subse- quent inheritance and gift transactions. Now, it would have been right and fair if normal tax- payers (who had also been subject to estate and gift tax in the past but had not been allowed to offset such tax against income tax) had held press conferences to complain about dis- crimination, too. Ultimately, the result of the intense debate was that the capital transfer tax rate applied to assets transferred into a private foundation was divided in half to 2.5%. By paying the capital transfer tax, the foundation acquires the right to accumulate capital gains on the disposal of relevant shareholdings, either tax-free or upon paying a reduced tax rate of only 12.5%. One tax case, in which disposal proceeds in the amount of EUR 600 Mio. were not taxed at all, was discussed in the media in the recent past. If the capital gains on this disposal had been subject to a corporate tax rate of 25%, the tax receipts would have exceeded the widely dreaded estate and gift tax had it still been in force. This debate gives us reason to take a closer look at the issue of foundations und to question what fiscal and economic benefits taxation rules governing foundations in Austria have. It is obvious that these taxation rules result in considerable retortions from other countries, in par- ticular from Germany, and create an image of Austria as a tax haven in the eyes of its EU partners. Now, the question is whether the supposed economic benefits of the tax advan- tages granted to foundations really make up for these inconveniences in the area of foreign policy. When the Private Foundation Act and the accompanying rules were introduced in 1993, ba- sically two arguments spoke in favour of their introduction. ? In inheritance proceedings where the heirs have no knowledge of economic matters, sha- reholdings held in large companies should not be divided, but remain under professional management; ? The tax framework should become attractive enough to re-attract capital invested abroad back to Austria and to prevent further capital outflows.