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06 July 2010
Trading with business assets
Many treasury departments of Austrian companies trade in securities or other financial instruments for their own account to raise income from financial assets. However, in light of a recent landmark ruling of the Austrian Administrative Supreme Court, such conduct is critical and may require companies to obtain a banking licence in Austria. The ruling ended proceedings relating to a Financial Market Authority (FMA) order against an Austrian company and confirmed the FMA's position that the appellant's trading in transferable securities and other financial instruments would require a banking licence under Austrian law.
Banking activities as stated in the exhaustive list under Section 1 para 1 of the Banking Act require a domestic or passported banking licence if conducted on a commercial basis and in Austria. The list of banking activities includes trading in transferable securities or derivative instruments based on transferable securities for a credit institution's own account or on behalf of third parties.
A banking licence is granted subject to strict qualifications, which may include an initial capital of €5 million, two directors who possess the requisite professional qualifications and experience, and owners that meet the requirements of sound and prudent management of the credit institution. Furthermore, a credit institution must comply with a variety of obligations, including specific reporting and accounting requirements set forth in the Banking Act.
The appellant's defence relied on arguing that all of its trading activities in transferable securities were not conducted by it on a commercial basis because all trades had been executed by a duly licensed credit institution on its behalf. However, the Administrative Supreme Court, as well as the FMA when initially issuing the order, rejected this argument and held that commercial conduct cannot be rebutted solely on the (formal) grounds that orders are routed through a duly licensed credit institution. This is because according to Austrian legal commentary and jurisprudence, the term 'commercial conduct' is traditionally broadly interpreted to include all activities intended to generate revenues.
Trading with business assets
The Administrative Supreme Court further dismissed the appellant's defence that the trading of transferable securities did not relate to business assets, but constituted private asset management of the company, which would therefore not require a banking licence. In contrast to the reasoning of previous administrative instances, the Administrative Supreme Court did not question whether a legal entity can in fact own private assets within the meaning of the Income Tax Code. Rather, the court held that booking the transferable securities as part of the appellant's current assets instead of its fixed assets could be taken as an indication of the trading purpose on the appellant's part. Therefore, the court concluded that the appellant met the criteria set forth in Section 1 para 1 of the Banking Act and accordingly had breached the duty to obtain a banking licence for its trading activities.
The ruling addresses what appears to be common market practice among treasury departments of large Austrian companies. As a result, various companies would likely be required to: (i) obtain a banking licence if they continue trading in securities on own account; or (ii) discontinue such activities. Accordingly, some Austrian commentators argue that an amendment of the Banking Act in this regard would be necessary, taking into account that trading of a company on its own account significantly differs from trading of a credit institution for its own account. Whereas a credit institution mainly trades on own account to hold transferable securities readily available for client orders, trading in transferable securities by a non-bank is usually intended to generate income from financial assets. Also, the Banking Act usually aims to protect a bank's customers, which will not be relevant to the trading activities of a private company.
In the meantime, companies are advised to limit carefully their trading activities in light of the ruling. Following the ruling, it seems likely that the FMA will qualify trading of transferable securities on a company's own account not as private asset management, but rather as a licensed banking activity.
For further information on this topic please contact Christoph Moser or Ursula Rath at Schönherr Rechtsanwälte GmbH by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email (email@example.com or firstname.lastname@example.org).
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