US embassy cable - 05VIENNA444

UNCLAS SECTION 01 OF 03 VIENNA 000444 
 
SIPDIS 
 
STATE FOR EUR/AGS 
TREASURY FOR OASIA/ICN/VATUKORALA 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE AND SEC/E.JACOBS 
SECDEF FOR OSD/ISP/EUR 
USDOC PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS FOR USOECD 
FRANKFURT FOR TREASURY 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, PGOV, AU 
SUBJECT:  Austrian Financial Markets - Reforms to Meet 
Future Challenges 
 
 
1.  SUMMARY:  The GoA recently implemented important 
legal changes to upgrade Austrian financial markets, 
enhance financial market stability, and create a level 
playing field for foreign investment funds.  An amendment 
to the Austrian Income Tax Act provides for equal tax 
treatment of income derived from foreign investment 
funds.  A Stock Exchange Act amendment tightens 
regulations on insider trading and introduces higher 
penalties, and a new Financial Conglomerates Act 
introduces an additional supervisory level for groups of 
banks, investment and insurance companies.  END SUMMARY. 
 
Sound and Resilient Financial Sector, but . . . . 
--------------------------------------------- ---- 
 
2.  The IMF's Financial Sector Stability Assessment 
report of July 2004 stated that Austria's financial 
sector is generally sound, has proved to be resilient to 
external shocks, and enjoys a high level of observance of 
internationally accepted financial sector standards. 
Further, the report recommended inclusion of supervision 
of conglomerates in the supervisory framework for the 
banking sector and, a substantial increase of the fines 
for violating securities market regulations. 
 
. . . . Upgrades to Meet Future Challenges 
------------------------------------------ 
 
3.  In past months, the GoA continued to implement 
measures to strengthen Austrian capital markets, pursuant 
to the government program.  Recently implemented measures 
also address the above-mentioned IMF recommendations, 
constitutional concerns about the tax treatment of income 
from foreign investment funds and a domestic insider 
case.  They also transpose EU Directives 2003/6/EC on 
insider trading and market manipulation and 2002/87/EC on 
the supervision of financial groups. 
 
Equal Tax Treatment of Foreign Investment Fund Paper 
--------------------------------------------- ------- 
 
4.  Tax wise, foreign investment funds will find a level 
playing field in Austria starting June 30, 2005.  On 
December 9, 2004, Parliament approved a GoA amendment to 
the Austrian Income Tax Act (Federal Law Gazette number 
I/180 of December 30, 2004), which provides for equal tax 
treatment of interest, profits and other income derived 
from foreign investment funds.  Holders of foreign fund 
certificates then can authorize their depository bank to 
withhold the applicable 25% capital gains tax, a form of 
income tax, on all income derived from the fund, and with 
no additional tax obligation.  Until now, only holders of 
domestic fund certificates could sign such a statement, 
while holders of foreign fund certificates had to report 
any profits as taxable income (taxed at the 25% capital 
gains tax rate).  However, to ensure that holders of 
foreign fund certificates met their tax obligation and 
disclosed their portfolio to the tax office, the GoA 
collected a so-called "safeguard tax" (in German: 
Sicherungssteuer), which obliged the depository bank to 
pay a 1.5% tax from the current value of the deposited 
fund certificates.  The safeguard tax was offset against 
the income tax bill.  As of June 30, 2005, the safeguard 
tax will only apply to holders of foreign fund 
certificates not authorizing their depository bank to 
withhold the 25% capital gains tax. 
 
Stricter Regulations against Insider Trading 
-------------------------------------------- 
 
5.  Stricter regulations against insider trading and 
higher penalties have been in place since January 1, 
2005.  On October 13, 2004, Parliament adopted the GoA 
bill for a Stock Exchange Act amendment (Federal Law 
Gazette number I/127 of November 16, 2004) to transpose 
EU Directive 2003/6/EC on insider trading and market 
manipulation.  The amendment introduces detailed 
definitions of insider information, market misuse and 
manipulation, admissible market practice, etc.  It covers 
insider trading with both financial instruments and 
commodities derivatives.  It defines insiders as members 
of administrative, management or supervisory bodies of an 
issuer, and any other persons having access to insider 
information through their profession or holding capital 
of an issuer.  The law also covers other people using 
insider information that reached their attention to 
obtain a profit or advantage or who use such information 
with gross negligence even without the intent of 
profiting. 
 
6.  Insider trading falls under the jurisdiction of the 
courts.  The maximum penalty for insiders is imprisonment 
of up to 3 years or, if the profit or advantage obtained 
exceeds Euro 50,000, imprisonment from 6 months to 5 
years.  (Until now, penalties were imprisonment of up to 
2 years or a fine of up to Euro 117,720.)  Penalties for 
people, even if not insiders, using insider information 
with the intent of obtaining a profit or advantage for 
themselves or a third party are imprisonment of up to one 
year or a fine of up to Euro 180,000.  If the profit or 
advantage obtained exceeds Euro 50,000, the penalty will 
be imprisonment of up to 3 years.  Penalties for all 
others, insiders or not, using insider information with 
gross negligence but without the intent of obtaining a 
profit or advantage for their own or a third party are 
imprisonment of up 6 months or a fine of up to Euro 
180,000.  The FMA will impose administrative fines of up 
to Euro 35,000 for market manipulation, unless the 
offense falls into court jurisdiction. 
 
7.  The new regulations expand FMA responsibilities 
regarding market surveillance.  The MFA can now 
temporarily suspend trade with certain papers or 
instruments, ban suspects from exercising their 
professions for the duration of procedures, and disclose 
information on insider and market manipulation offenses 
and perpetrators to the public. 
 
8.  The FMA has to cooperate closely and exchange 
information with supervisory agencies of other EU and EEA 
(European Economic Area) member states, pursuant to the 
law.  Cooperation of the FMA with third country 
supervisory agencies, including the SEC, remains 
unchanged.  Stephan Karas, head of the FMA's division for 
international affairs and European integration, confirmed 
that there is no Austrian-U.S. bilateral agreement to 
facilitate FMA-SEC cooperation.  Thus, bilateral 
cooperation continues pursuant to paragraph 47 of the 
Stock Exchange Act.  This permits disclosure of official 
information to foreign supervisory authorities under 
certain conditions, such as reciprocity and the assurance 
that there will be no violation of Austrian bank secrecy 
rules. 
 
9.  The text of the Stock Exchange Act (in German: 
Boersegesetz), as amended, is available on the website of 
the Vienna Stock Exchange in German language under 
http://www.wienerboerse.at/cms/1/81/118.  The informal 
English language version under 
http://www.wienerboerse.at/cms/2/81/377 will be updated 
soon to also reflect the latest amendment. 
 
Additional Supervision of Financial Conglomerates 
--------------------------------------------- ---- 
 
10.  A new law, the Financial Conglomerates Act (Federal 
Law Gazette number I/70 of July 14, 2004), went into 
effect January 1, 2005 and implements regulations on the 
supervision of financial conglomerates.  It applies the 
first time to financial statements for business years 
starting after December 31, 2004.  The law defines 
financial conglomerates as groups of companies, which 
include at least one insurance company and at least one a 
bank or investment services company.  In Austria, several 
heterogeneous financial groups are likely to qualify as 
conglomerates.  The law requires financial conglomerates 
and groups with some cross-sectoral elements to 
consolidate the capital of the group's banking, 
investment and insurance entities to avoid double use of 
the capital across the various financial sectors.  It 
also introduces an additional supervisory layer: in 
addition to supervising a conglomerate's individual 
banking, insurance or investment services entities, the 
FMA will also exercise supervision at the conglomerate 
level on a consolidated basis.  The Austrian National 
Bank is responsible for assessing the limitation of 
market and credit risks of banks or banking groups with 
conglomerates and will thus also play an important role 
in supervising conglomerates.  The supervisory 
authorities will have to pay special attention to the 
complexity of conglomerates, risk concentration and intra- 
group transactions. 
 
BROWN