Double taxation agreements
General information on double taxation agreements
Austria has entered into agreements known as double taxation agreements with the most important countries to prevent traders who undertake cross-border activities from being taxed twice – that is, both in Austria and abroad.
A double taxation agreement (DTA) regulates which of the two countries may apply its domestic tax law – that is, which country can ultimately collect taxes – and which one has to forgo its taxes, in whole or in part. In all cases, the aim is to ensure effective single taxation. For a trader to make use of a DTA, it is a precondition that the trader should be resident in Austria and can prove this to the other country by presenting an Austrian Certificate of residence. The certificate of residence can be obtained by the trader from her/his tax office (Form ZS-A).
If the DTA gives the other country the right of taxation, then tax is applied (who, how, how much etc.) solely according to that country’s tax law. The trader must ensure for herself/himself that the taxation has been applied correctly. The Austrian tax office can offer no assistance in this respect. In particular, the trader must look to the relevant foreign tax authorities for information on the repayment process necessary in a number of countries.
- Relief from foreign withholding taxes (→ BMF)German text
- List of Austrian double taxation agreements (→ BMF)German text
Ground rules of double taxation agreements
Every double taxation agreement (DTA) is a separate bilateral state treaty (law) and may therefore differ from DTAs with other states. In each specific case, therefore, reference should always be made to the relevant DTA. As far as possible, however, DTA entered into by Austria are modelled on the OECD Model Tax Convention. According to this, the country where the activity is taking place is permitted to tax trading income if the trader has a permanent establishment there for the activity.
The activities of artists and sportspersons may for the most part be taxed in the country where they take place even if there is no permanent establishment (withholding tax).
If the trader forms a separate company for its activities in the other country, then the income of that company (profits, losses) is assessed for tax exclusively in that other country. Usually, only the distribution of profits of such foreign companies to the Austrian trader (dividends) will be taxed in Austria. If the trader is a corporation, special rules must be observed. Many DTAs allow the distribution of profits of such foreign companies to the Austrian trader (dividends) to be taxed in the other state, although as a rule the DTA restricts this withholding tax deduction (mostly to five percent in the case of inter-company dividends and to 15 percent for other dividends). Under EU-law, withholding tax on profit distributions to companies with a significant shareholding is not permitted in most cases.
If income under the DTA is taxable in the other country, then double taxation is avoided either by treating such income as free of tax in Austria (subject to the progression proviso [Progressionsvorbehalt]), or by offsetting the foreign tax against Austrian income tax or corporation tax. In all cases, such income must be entered on the tax return.
A permanent establishment is any fixed business premises through which the business activities of a company are performed, in whole or in part. In double taxation agreements (DTAs) the following premises are designated a permanent establishment: management offices, branch offices, operations offices, manufacturing sites, workshops, mines, oilfields or gas fields, quarries. This is simply a list of typical permanent establishments and is not definitive – other fixed business premises may also be regarded as a permanent establishment. Building works and installations will always be regarded as forming a permanent establishment if they last for longer than twelve months (in some DTAs this timescale is different, so the terms of the relevant DTA should always be noted).
Buildings that are solely warehouses, exhibition spaces or distribution depots are usually not a permanent establishment, and neither are stocks of goods themselves. Similarly, purchasing or information-gathering facilities do not constitute a permanent establishment and neither do premises for preparatory or auxiliary activities. In such cases, too, however, attention should always be paid to the relevant DTA, since many DTAs include variations in their definition of a permanent establishment.
The DTAs also refer to a permanent establishment in cases where the business has an employed representative who holds the power to sign contracts and exercises such power (‘agency permanent establishment’). In such cases, the other country may tax those profits generated by the trader through the representative. Tax on commission is payable by the representative herself/himself. Brokers, merchants and other independent representatives do not give rise to a permanent establishment as long as they are performing their normal business activities.
Some DTAs provide that even without fixed business premises or a representative, a permanent establishment is deemed to exist if the entrepreneurial activity in the other country exceeds a specified period, mostly six months (‘service permanent establishment’). Since a general liability for tax in the country where the activity takes place is dependent on the presence of a permanent establishment (or agency permanent establishment or service permanent establishment), these matters should be clarified precisely.
If a permanent establishment is operating in the other country, the profits of the business must be divided between the permanent establishment and the parent company. Under DTA law, profits should be divided according to the arms-length principle. The arms-length principle requires that the business relationship between the permanent establishment and the parent company be handled in the same way as business relationships between independent businesses.
- Associated Companies and Transfer Pricing (→ BMF)German text
- Part two of the Verrechnungspreisrichtlinien 2010 (VPR 2010)
Associated companies and transfer pricing
Business relationships between associated companies (between parent companies and subsidiaries, for example, or between companies under the same control) must be managed in pricing terms according to the arms-length principle. This means that associated companies must apply transfer prices that correspond to those prices that would have been agreed between independent business partners.
- Associated Companies and Transfer Pricing (→ BMF)German text
- Verrechnungspreisrichtlinien 2010 (VPR 2010)
Artists and sportspersons
For artists and sportspersons, double taxation agreements (DTAs) regularly specify that income from foreign appearances may be taxed in the country where the appearance took place, regardless of whether the person is self-employed or otherwise and also regardless of whether a permanent establishment exists there.
Dividends, interest, licences (licensing fees)
Under many DTAs the source country has no right of taxation, although some DTAs do recognise a (limited) right of taxation at source. Whether the source country waives the retention of the source tax at the point of payment or allows the deduction of source tax with subsequent repayment on request will depend on the law in the source country. If the source country permits payment without deduction of tax at source, the trader will need to present to the foreign source of the interest/dividends/licensing fees a certificate of residence. The certificate of residence can be obtained by the trader from her/his tax office (Form ZS-A). The repayment procedure is determined by domestic law in the source country. Thought should be given at the time of investment to the fact that countries are increasingly specifying expensive supporting documents (e.g. certified copies of ID documents, declarations from intermediaries) as a condition of repayment.
If the source country requires the deduction of tax at source and makes the repayment in accordance with the DTA only on request, the trader must submit the request to the responsible authority in the source country using the applicable withholding tax form from that country.
As a rule, the taxation of employees depends on where they work. If an employee of an Austrian company carries out an activity abroad, the other state may tax the wages/salaries attributable to the foreign activity. Depending on which method is provided for in the respective DTA, Austria must exempt the income (subject to the progression proviso [Progressionsvorbehalt]) or credit the foreign tax attributable to the income (up to the maximum credit amount).
However, in the case of short-term activities abroad, provided that the employee does not work for a permanent establishment of the Austrian company in the country of activity or works for a foreign company, the right of taxation remains with the employee's country of residence.
In cases where staff are supplied (as a passive service), the recent adjudication of the Austrian Supreme Administrative Court (VwGH) (the finding of 22 May 2013, 2009/13/0031) means that essentially, the person for whom the work is being performed should be regarded as the employer. Hence the leased employees' income (wages/salaries) should be taxed in the country where the activity takes place, even in the case of short-term activities. If employees are hired out to perform work in Austria, the Austrian employer is subject to special obligations.
Since the rules in the individual DTAs vary, it is recommended in all cases to seek clarification of the legal position according to the DTA in advance, from a competent source. If the country where the work takes place has the right of taxation, then the precise details (does the employee herself/himself submit the tax return and make the payment? Does the customer withhold tax at source?) will be determined solely by tax law in that country. Traders must ensure for themselves that the taxation has been applied correctly in that country – the Austrian tax office can offer no assistance in this respect.
Difficult issues can arise with employee postings within the group and with staff leasing. It is recommended in all cases to seek clarification of the legal position according to the DTA in advance, from a competent source.
If it is determined that the income of the employee can be taxed in the country where the work takes place and is indeed taxed there, then under certain conditions it may not be necessary to deduct salary tax in Austria. It is recommended in all cases to seek clarification in advance, from a competent source, since the employer continues in principle to be liable for correct withholding and payment of salary tax.
- Changes in the tax treatment of cross-border employee postings (Decree of the Federal Ministry of Finance 12.06.2014, BMF-010221/0362-VI/8/2014)German text
- External Trade Centre of the Austrian Chamber of CommerceGerman text(can provide assistance in matters of foreign taxation)
Double taxation in spite of double taxation agreements: mutual agreement procedure
It can happen that both Austria and the foreign country seek to charge tax, even though a DTA is in existence. The most common reason for this is that the two countries assess the same set of facts differently (e.g. does a particular facility that the trader is using in the foreign country already meet the criteria of a permanent establishment?) or interpret a term in the DTA differently (e.g. ‘employer’ in the case of staff postings).
In such cases, an Austrian trader who has tried and failed to get both the foreign country and the Austrian tax office to treat the matter in the same way has the option of applying for a mutual agreement procedure to be applied. The competent authorities will then work with the foreign country to find a solution that will avoid double taxation.
Traders who represent the facts of the case differently to the foreign country from the way they represent it to the Austrian tax office, or who give rise to a possible conflict over taxation by misrepresenting the matter, cannot expect to receive the support of a mutual agreement procedure.
- Mutual agreement and arbitration procedures (→ BMF)German text
- BMF-information from 24 July 2019: Mutual agreement and arbitration procedures under double taxation treaties and the EU Arbitration ConventionGerman text
Inheritance and gifts
As a result of the abolition of tax on inheritances and gifts in Austria, cases of international double taxation in this area can no longer arise. If business assets or real estate located in a foreign country are given away or bequeathed, then the foreign country has the right of taxation under the rules of the DTA. In the case of assets belonging to a foreign permanent establishment, therefore, tax may be payable in that country if its tax law provides for this. Existing DTAs cannot prevent this in the field of inheritance and gift tax since the right of taxation for such assets is assigned to the foreign country and no double taxation arises.
responsible for content: Federal Ministry of Finance