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 (→ BMF)German text (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.
As a rule, the taxation of employees depends on where they work. More information on taxation under double taxation agreements for employees (→ oesterreich.gv.at)German text is available on oesterreich.gv.at.
- 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.
DTAs provide for various ways of avoiding double taxation. There are two main methods for avoiding double taxation. Tax paid abroad can be credited to an individual's tax bill (the credit method). Alternatively, income earned abroad can be exempted from tax, even if it is still taken into account when calculating the progressive tax rate to which the individual is subject.
The basic idea behind the credit method is that the tax due in the source country (i.e. the state in which the individual is working) is credited against the individual's tax bill in their country of residence (up to a maximum limit).
Ms E. works for a Swiss company in St Gallen. However, she lives in Austria with her family, meaning she is ordinarily resident in Austria. Her annual income is EUR 35,000, all of which comes from her employment. According to the principle that income should be taxed where it is earned, she is subject to tax in Switzerland. At the same time, since she is resident in Austria, Austria also has the right to tax her income. The DTA between Austria and Switzerland stipulates that the credit method should be used to prevent double taxation of income, provided that income is not earned on a self-employed basis. Ms E. has already paid tax worth EUR 2,700 in Switzerland.
Therefore, her Austrian income tax liability is calculated as follows:
(35,000 – 31,000) x 42 per cent + 5,950 - EUR 400 (transportation deduction) = EUR 7,230.00
- tax already paid in Switzerland EUR 2,700.00
Income tax due in Austria: EUR 4,530.00
Under the exemption method, the country in which the individual is resident exempts earnings taxed in the source country from income tax. However, this income is still taken into account when calculating the (progressive) tax rate to which the individual is subject.
Mr L. lives with his family in Austria. Between January and the end of August, he earns taxable income in Austria amounting to a total of EUR 23,000. In September, he starts work for a German shipping company, although Austria remains his sole place of residence. He earns a total of EUR 11,000 while working on the ship. According to the DTA between Germany and Austria, these German earnings are taxable in Germany. The total income tax due on these earnings in Germany amounts to EUR 2,400. Austria cannot tax these earnings a second time once they have been taxed in Germany. However, the Austrian authorities can take these earnings into account when calculating the rate of tax Mr L. should pay in Austria. This is calculated as follows:
Earnings taxable in Austria (EUR 23,000) + earnings taxable in Germany (EUR 11,000 Euro) = total earnings of EUR 34,000
Therefore, Mr L.'s income tax liability under Austrian law is:
Income tax theoretically due on all earnings: (34,000 – 31,000) x 42 per cent + 5,950 = EUR 7,210
Average tax rate: (EUR 7,210 / EUR 34,000) = 21.21 per cent
Actual tax payable: EUR 23,000 x 21.21 per cent - EUR 400 (transportation deduction) = EUR 4,478.30
Therefore, Mr L.'s total tax liability is: EUR 2,400 Euro (in Germany) + EUR 4,478.30 (in Austria) = EUR 6,878.30
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 2021 (VPR 2021) (→ BMF)German text
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 2021 (VPR 2021) (→ BMF)German text
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 (→ BMF)German text (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.
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 Convention (→ BMF)German 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 the content: Federal Ministry of Finance