Issue 63

MLI - First changes to Austrian double tax treaties from 1.1.2019 

From 1 January 2019 onwards, the Multilateral Instrument (“MLI”) will modify the Austrian double tax treaties (“DTT”) with France, Israel, Lithuania, Poland, Serbia, Slovakia and Slovenia.

Entry into force of the MLI

The MLI is one means of implementing the results and findings of the OECD/G20 BEPS initiative. It implements tax treaty-related measures (i.e. treaty abuse prevention, dispute resolution improvements etc.) in existing bilateral tax treaties in a synchronised and efficient way. The convention entered into force on 1 July 2018. Austria was one of the first five signatory states. Austria submitted the following 38 DTTs for modification in accordance with the MLI (“covered tax agreements” in the terms of the convention): Belgium, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel, Italy, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Pakistan, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Switzerland, Turkey.

The MLI will only modify the covered tax agreements if both contracting jurisdictions (the states party to a given DTT) have ratified the MLI and share a common position regarding the MLI. Thus, the MLI also needs to enter into effect on the DTT level in both states. For events in 2019 giving rise to local withholding taxes (WHT), the modification(s) of the respective treaty (e.g. modifications ensuring consistency) will apply from 1 January 2019. For all other taxes (e.g. assessment in the course of a tax return), the entry into effect of the modified DTT is delayed for another year (until 2020), if the partner country’s ratification took place after 30 June 2018.

As a result, the modified DTT with Austria is fully applicable for Poland and Slovenia as of 1 January 2019 for all taxes ruled by the DTT. By contrast, France, Israel, Lithuania, Serbia and Slovakia ratified the MLI after 30 June 2018 (and others may also ratify the MLI before the end of December 2018). Therefore, from 1 January 2019 the modified DTTs will only have to be considered for events giving rise to WHT. The full application of the modified DTTs with these states will not commence until 1 January 2020.

Overview of the Austrian modifications through the MLI

Beyond the adoption of the obligatory minimum standard (i.e. regarding prevention of treaty shopping, treaty abuse or settlement of disputes etc.), Austria’s modification of the covered tax agreements has been relatively restricted. As a result, only a small number of additional modifications were selected:

• Anti-abuse rules for permanent establishments (PEs) situated in third jurisdictions (Art. 10 MLI)
• Artificial avoidance of PE status for activities of an auxiliary or preparatory character (Art. 13 MLI item [a]). According to the Austrian explanatory notes relating to the ratification of the MLI, the adoption of this optional provision only serves the purpose of clarification. Even before the entry into force of the MLI, the Austrian authorities have only applied the exemption for auxiliary or preparatory activities if the activities performed by the PE did not belong to the core business of the entity.
• Corresponding adjustments relating to transfer prices (Art. 17 MLI)
• Arbitration (Part VI of the MLI): Going beyond the minimum standard, Austria opted for a longer period in which arbitration proceedings may be initiated (3 instead of 2 years) and also selected the “final offer” method, in accordance with which the arbitrators only choose between solutions suggested by the parties and do not make independent suggestions. 

Martina Gruber

Nikola Breinhölder

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Letter rulings on dividend withholding tax relief in two letter rulings

Austrian Ministry of Finance expressed its opinion on specific questions in connection with dividend withholding tax

Indirect participation of an Austrian tax resident in a German corporation

Letter ruling no. 3406 refers to the earlier letter ruling no. 3338. This earlier ruling dealt with a case in which relief from German withholding tax was restricted in the context of a distribution to an Austrian company 100% held by an Austrian resident individual due to the application of Section 50d para 3 of the German Income Tax Act. The reason for restricting withholding tax relief is that the shareholder of the foreign corporation would not be entitled to the relief if he had obtained the dividend income directly. The Austrian Ministry of Finance has indicated that the German withholding tax (reduced to 15%) could be credited against the Austrian withholding tax triggered by the distribution to the individual shareholder. According to the earlier letter ruling (3338), the deduction is permissible if it can be demonstrated that the distribution to the individual shareholder made by the Austrian company is the same distribution that was subject to German withholding tax.

In the joined cases C-504/16 (Deister Holding AG) and C-613/16 (Juhler Holding A/S), the ECJ has held that the provision in German law mentioned above infringes the Parent-Subsidiary Directive and the freedom of establishment. In light of this outcome, the Austrian Ministry of Finance has stated in letter ruling no 3406 that the avoidance of double taxation, which originated in the application of the German rule that fails to comply with the EU regulations, should not be reached by an unilateral measure from Austria, i.e. by granting a credit for the German withholding tax paid. Instead, the double taxation should be avoided either by the non-application of the German rule or by the refund of the withholding tax by the German tax authorities. The earlier letter ruling no 3338 is therefore rendered obsolete.

No withholding tax on distribution to a 100% indirect French corporate shareholder

A dividend distribution from an Austrian corporation, which is (100%) indirectly held by a French corporation through a two-layer Austrian partnership, is not subject to withholding tax under  Section 94 item 2 of the Austrian Income Tax Act (ITA) if the participation can be functionally attributed to the business assets of a domestic (partnership) permanent establishment of a corporation resident in an EU/EEA country.

In cases involving corporations resident in EU/EEA countries, the freedom of establishment requires the application of withholding tax rules for domestic distributions without restrictions being applied to foreign shareholders, i.e. regardless of the fulfilment of the one-year holding period or of additional document requirements under the decree on Section 94a para 2 ITA.

However, the entitlement to the withholding tax exemption must be properly evidenced and documented by the distributing corporation. In addition to a certificate of residency, such evidence can be provided by a written declaration from the limited taxpayer, containing information regarding the attribution of the participation to the domestic permanent establishment as well as the tax treatment of the dividend distribution in Austria, indicating the corresponding Austrian tax number.

The non-discrimination provision concerning permanent establishments in the Austria-France tax treaty is no more advantageous than the EU provisions in this regard.  

Wolfgang Prehal

Nicolas Stangl 

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Digital Products and Services

The Austrian Federal Ministry of Finance recently published a letter ruling on payments made to a German automotive corporation in connection with digital goods (unlocking of hardware and software components in cars) and electronic online services for cars. These goods and services were offered to Austrian customers via Austrian sellers and importers, although the customers enter into direct contracts with the German automotive producer (EAS 3408).

The Ministry provided guidance on whether a withholding tax (WHT) obligation exists for such payments and whether an Austrian permanent establishment (PE) is created in such cases.

Withholding Tax in Austria

Licensing income for the provision of software is subject to Austrian WHT if the licence (under Austrian copyright law) grants the reproduction or modification of the software for a specific or indefinite period of time. In the event of the sale of such rights (i.e. the seller transfers his right of disposal), WHT is not deducted.

The German Federal Ministry of Finance also considers the transfer of rights as subject to limited tax liability if the user has a comprehensive right of disposal and has additional economic exploitation rights (e.g. reproduction, processing, distribution or publication).

In the case discussed in the letter ruling, it is expected that the customers are only granted a right to use the software (i.e. no reproduction or modification) for their own purposes, which does not constitute a right of exploitation and use under Austrian copyright law. Thus, Austrian WHT should not apply.

Permanent Establishment

If the German corporation does not have a permanent local facility in Austria, a “dependent agent” could constitute a PE.

In the case discussed in the letter ruling, the Austrian importers do not have the power to enter into contracts on behalf of the German car manufacturer for the digital products and services described and the contract is concluded directly between the customers and the manufacturer. However, the Austrian importers discuss and negotiate the details of the sales contract with the customers. The power to enter into contracts is not required in a legal sense to determine a dependent agent; instead, the economic perspective is relevant. The fact that the customer does not have to enter into contract negotiations with the German producer is an argument in favour of the existence of a PE (this view is taken by the Austrian tax authorities who refer to the OECD commentary on the Model Tax Convention). Further, the acceptance of orders made by the costumer can also create a PE (“ordering agent”).

A PE can be denied if the Austrian seller qualifies as “independent agent” under the Double Tax Treaty (DTT) between Austria and Germany. The strict criteria for an independent agent include, among others, the authority to issue instructions, the level of control and the entrepreneurial risk borne by the agent. An analysis on a case-by-case basis is required.

Between Austria and Germany, a PE can be avoided if the respective companies qualify as affiliated companies in accordance with Article 9 of the DTT Austria-Germany and the services are remunerated at arm’s length transfer prices.

Martin Slabina

Tanja Hanel

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Austrian Federal Financial Court (BFG) on the Applicability of Section 48 Austrian Federal Tax Code (BAO)

The BFG in its.2018, RV/7102556/2017 has examined the question of the applicability of Section 48 Austrian Federal Tax Code in the context of cross-border tax disputes.

A company resident in Austria (‘AT GmbH’) has a subsidiary in Hong Kong, selling products produced by the Austrian entity. In the course of a tax audit of AT GmbH, it was determined that the transfer prices for supplies of goods to the business unit were set below arm’s length rates resulting in a transfer pricing adjustment. The tax authorities in Hong Kong have rejected a non-binding request for a corresponding adjustment by telephone. Subsequently, AT GmbH has applied for relief from double taxation according to Section 48 BAO for the respective TP-adjustment, as this increase in profit in course of the tax audit was taxed in Austria and Hong Kong.

The Austrian Ministry of finance (BMF), being the competent authority for application on relief from double taxation according to Section 48 BAO, rejected the application on the basis that the risk of double taxation in the present case should be resolved by a mutual agreement procedure. Consequently, the Austrian BMF did not see a necessity to apply Section 48 BAO and indicated that a temporary relief from double taxation for the duration of the mutual agreement procedure ought to be considered separately.

In its decision, the BFG follows the reasoning of the BMF. Thus, international tax disputes should primarily be resolved through mutual agreement procedures. The BFG has held that the taxpayer should take all possible legal remedies before applying for relief from double taxation under Section 48 BAO.

The case is currently pending at the Supreme Administrative Court.

Martina Gruber

Edward Saunders 

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Payrolling is a form of temporary employment and does not constitute an employment relationship between user undertaking and employee

In a recent decision, the Austrian Supreme Court (“OGH”) ruled on payrolling (OGH of 29 May 2018, ObA 51/17h). In the case of payrolling, one party (“temporary work agency”) hires out employees to another party (“user undertaking”). This situation has greater complexity than a regular employment relationship because the user undertaking assumes essential employer features while the temporary work agency is only responsible for contracting the employees and for accounting and paying the wages and salaries.

Ruling

The OGH ruled that payrolling constitutes temporary employment. Therefore, a direct employment relationship only exists between the temporary work agency and the employees, but not between the user undertaking and the employees. Consequently, the temporary work agency is primarily responsible for fulfilling the employees’ entitlements.

Consequences

User undertakings may exercise various employer rights without running the risk of a (covert) employment relationship with the leased employees. In the case considered by the OGH, the user undertaking had the following rights and responsibilities in particular:

• Specifying the content of job advertisements
• Choosing the platforms where job advertisements are placed
• Selecting candidates
• Determining the conditions set out in the employment contract between the temporary work agency and the employee
• Deciding on termination of employment.

However, the payrolling (i.e. accounting and payment of wages and salaries) and contracting of employees necessarily has to remain with the temporary work agency to avoid the risk of a direct employment with the user undertaking, and the user undertaking thus being primarily liable for the employees’ entitlements. Nevertheless, the user undertaking has several mandatory obligations towards the leased employees (e.g. compliance with employee protection and anti-discrimination regulations, liability for pay and social security contributions during the temporary employment relationship etc.).

Ursula Roberts

Lisa-Maria Jobs

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