Austrian Tax News. Austrian Withholding Tax Ordinance (KESt-Erlass) In this issue. Issue 35, June 2012

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1 Austrian Tax News Austrian Withholding Tax Ordinance (KESt-Erlass) In this issue Direct Taxes Austrian Withholding Tax Ordinance (KESt-Erlass) by Patrick Moik and Hannes Rasner Speculation period for (indirectly) held real estate property by Guelay Karatas and Lukas Bernwieser Withholding tax relief at source with respect to ongoing business relationships by Michael Wenzl and Alexander Wagner Update on double tax treaties by Michael Wenzl and Alexander Wagner Tax Treaty between Switzerland and Austria by Nina Gindl and Martin Spornberger What constitutes a permanent establishment? by Guelay Karatas and Mathias Knittel Different tax treatment: Manager of a foreign PE vs. Austrian company s managing director working in the foreign PE by Alexandra Dolezel and Mathias Knittel Expats Crossborder assignment of managing director UFS RV/0488-F/09 by Wolfgang Schneider Austrian Tax Facts and Figures The new Austrian withholding tax and capital gains tax regime (which has a major impact on Austrian investors income from capital assets) came into effect on 1 April Generally speaking, capital gains and income from derivatives are now also subject to taxation for private investors, irrespective of their various holding periods. Against this background, the Austrian Ministry of Finance published a withholding tax ordinance in March 2012 in order to represent its view on essential points and some outstanding issues regarding the new Austrian withholding tax and capital gains tax regime. The new withholding tax ordinance provides the Ministry s view on: Transitional provisions In general, the new taxation became effective for any profits derived from the sale of shares / investment fund units purchased as of 1 January 2011 and for the sale of bonds and derivatives purchased as of 1 April Also, the corresponding withholding obligation for Austrian depository agents became effective on 1 April Taxation of derivatives In general, only realized income (e.g. cash settlement or capital gains) from securitized derivatives will be subject to the special tax rate of 25% and (if applicable) withholding tax deduction (the option premium being taxable upon settlement of the option).

2 Offsetting losses Loss offsetting with respect to investment income is achieved by means of comprehensive and ongoing loss offsetting carried out by the depositary agent. Depositary agents will be obliged to carry out the ongoing offsetting of losses within the calendar year as from 1 January If any losses are incurred, the taxes resulting from a later/simultaneous gain is to be reduced by the loss. If gains are realized that are not offset by a former loss, withholding tax is to be withheld and paid, with a later loss resulting in a credit. The credit is capped at 25% of the losses. Private investors may not carry forward losses incurred in one fiscal (calendar) year (or the balance of this year) into the following year. Losses incurred in the period between 1 April 2012 and 31 December 2012 will be offset in the course of a final settlement (not in an ongoing manner). The deadline for this final settlement is 30 April Accrued interest Accrued interest is subject to (immediate) taxation at the level of the seller when the securities are sold. Purchased accrued interest increases the acquisition costs of the purchaser for tax purposes, thus reducing the capital gain of a subsequent sale. Foreign currency gains Foreign currency purchased since 1 April 2012 and kept on a foreign exchange account is subject to a progressive tax (not a withholding tax) upon conversion or pay-out in EUR, irrespective of the holding period. Furthermore, the withholding tax ordinance provides additional information on the special tax rate of 25%, investment funds, private foundations, corporations under public law (Körperschaften öffentlichen Rechts), account transfers, taxation of individuals with respect to capital assets held as business assets. Corresponding ordinances from the Austrian Ministry of Finance In addition to the withholding tax ordinance, the Austrian Ministry of Finance also published three more separate ordinances. The acquisition costs ordinance (Anschaffungskostenverordnung) was published to govern the tax base for the deduction of Austrian withholding tax. Acquisition costs unknown to the withholding agent are fictitiously set at the market price applicable on 1 April This also applies to acquisition costs that can only be investigated / identified with unreasonable effort. The new ordinance to reduce Austrian withholding tax by crediting withheld foreign tax (Auslands- KESt-Verordnung). The ordinance on corporate actions (Kapitalmaßnahmen-Verordnung) outlines which corporate actions are considered tax-neutral and which are considered tax-relevant for withholding tax purposes. patrick.moik@at.pwc.com hannes.rasner@at.pwc.com Speculation period for (indirectly) held real estate property Contrary to the prevailing opinion held by tax authorities, the Independent Tax Court applied the oneyear speculation period with respect to sales of interest in a partnership holding only real estate. Where an individual privately holds real estate property, such property can usually be sold after the speculation period, which ends ten years after the acquisition. Under the old tax regime this was exempt from Austrian income tax. Where an individual privately holds other assets (other than real estate property, such as shares, securities, etc.) a shorter speculation period of one year applied. Capital gains upon the sale of such property were only taxable within the respective speculation period and were taxed at up to 50% of the effective personal income tax rate. Sales effectuated after the respective speculation period were not subject to income tax. Prevailing opinion of the tax authorities Partnerships (such as general part- 2

3 nerships or limited partnerships) are considered transparent for tax purposes. If a partnership itself sells property, the capital gains upon such sale are taxed on a pro-rata basis at the level of the underlying partners. On this basis, the Austrian tax authorities currently take the view that a sale of interest in a property management partnership is, in fact, to be seen as a pro-rata sale of real estate subject to income tax if effectuated within the relevant ten-year speculation period. Thus, for tax purposes, Austrian tax authorities simply ignore the fact that what is sold is not real estate property, but partnership interest. Decision of the Independent Tax Court In its recent case, the Independent Tax Court was supposed to examine whether (i) the ten-year speculation period for direct sales of real estate property (previously adopted by the tax authorities), or (ii) the one-year speculation period for sales of other assets was applicable in case of a sale of interest in a limited real estate management partnership. This decision mirrors the case law of the German Federal Fiscal Court. In the view of the German Federal Fiscal Court, it is not admissible to ignore the existence of a partnership when determining the nature of the object sold in the course of a transaction (sale of real estate property vs. sale of other assets). On this basis, the Independent Tax Court ruled that the purchase and sale of interest in an asset management partnership does not qualify as a proportionate real estate transaction. Rather, such transaction is to be seen as the purchase/sale of other assets, for which the one-year speculation period applies. Stability Act 2012 Following a tax reform, the speculation period will be abolished for real estate property sales from 1 April 2012 onwards. In future, gains upon the sale of real estate property are to be taxable irrespective of any speculation period and are to be taxed at a standard rate of 25%. However, in light of the current decision, sales of interest in a real estate management partnership would as such not qualify as real estate property sales transactions and would therefore give rise to certain carveout strategies for real estate property outside of the new tax regime. Outlook In this context, we need to consider that the Austrian legislator already reacted to the current decision of the Independent Tax Court in the draft version of the new tax amendment act 2012 (AbgÄG 2012). Based on this draft, a sale of partnership interest qualifies as a proportionate sale of partnership assets. As a consequence, the sale of interest in a real estate management partnership would be considered a real estate property transaction taxable under the new tax regime. This draft has now been circulated throughout the Austrian tax community for comments. If and to what extent the current draft will be passed is not clear at this stage. g.karatas@at.pwc.com lukas.bernwieser@at.pwc.com Withholding tax relief at source with respect to ongoing business relationships Austria levies withholding tax (WHT) on a number of payments made to non-resident recipients (e.g. dividends, royalties, etc). A full or partial relief may be achieved under an applicable double tax treaty. The ordinance on double tax treaty relief ( DBA-Entlastungsverordnung ) specifies the requirements for a relief at source: Certificate of residence ( ZS-QU1 form for individuals or ZS-QU2 for corporations) issued by the foreign tax administration within one year prior to or after the payment and showing the respective amount of income. Confirmation of the recipient (corporations only) that its business activities go beyond mere asset management and that it has its own employees and office space. The Austrian Ministry of Finance recently published some clarifying information on WHT relief at source with respect to ongoing business relationships. In this case, it would not be required to file the above mentioned form ( ZS-QU1 or ZS-QU2 ) for every single payment. However, the form should contain a reference to a separate document which shows the individual payments. This document is to be submitted to the foreign recipient. Thus, two approaches would be possible: 3

4 The certificate of residence is obtained prior to the first payment and includes a reference to a separate document. This document which shows the individual payments in detail is subsequently provided to the foreign recipient. No exposure of liability arises with respect to withholding tax relief at source. Alternatively, no WHT is levied at source. However, the certificate of residence which shows the overall amount of payments made is to be provided within one year after the first payment. This alternative may be chosen if the recipient is trustworthy. michael.wenzl@at.pwc.com alexander.wagner@at.pwc.com Update on double tax treaties Qatar On 31 December 2010, Austria and Qatar signed their first double tax treaty (DTT) applicable to taxes on income and on capital. The treaty will become effective as from 1 January The DTT corresponds predominantly to the OECD Model Convention. Substantial differences are mentioned below: The term resident of a Contracting State in the DTT does not as in the OECD Model Convention refer to a tax liability in the respective state. With respect to Qatar, the term directly refers to residence, the centre of vital interests of individuals or the place of actual management of corporations. A building site or construction or supervisory activity constitutes a permanent establishment if it lasts more than six months (twelve months according to the OECD Model Convention) in any twelve month period. Dividends, interest and royalties may only be taxed in the state of residence of the recipient. However, royalties may also be taxed in the state of source up to 5% (0% according to the OECD Model Convention). The provision on the taxation of capital gains mostly corresponds to the OECD Model Convention. However, what is not included is a so called real estate provision, which allocates the taxation right of the alienation of shares in real estate companies. Thus, capital gains from the alienation of any shares are only to be taxed in the state of residence of the alienator. The DTT includes a special provision for independent personal services. Basically, remunerations may be taxed in the state of residence unless the remuneration is borne by a permanent establishment in the other state or if the recipient is present in the other state for a period exceeding 183 days in a twelve-month period. Basically, artists and sportsmen have to be taxed in the country of activity. However, the state of residence has the taxation right if the visit to the other state is supported by public funds. Guest teachers and scientists are exempt from taxation in the host country unless their stay exceeds a two-year period. In order to avoid double taxation both countries use the credit method. Tadzhikistan On 7 June 2011, Austria and Tadzhikistan signed their first DTT applicable to taxes on income and capital. The DTT has not yet been ratified by Tadzhikistan, thus the DTT may become effective by January 2013 at the earliest. In the meantime, the DTT with the USSR applies. In general, the DTT follows the OECD Model Convention; any substantial differences are described below: Dividends, interest and royalties may only be taxed in the state of residence of the recipient. However, the state of source may charge tax on dividends of up to 10% (for portfolio shares) and up to 5% (for participations of at least 15%). Interest may also be taxed in the state of residence up to 8%, which may be reduced to 0% if the country of residence, the regional authority, national bank, etc. is the beneficial owner. With respect to royalties, the withholding tax of the country of source may not exceed 8%. The provision on the taxation of capital gains largely corresponds to the OECD Model Convention. However, no so called real estate provision is included. In accordance with the OECD Model Convention, a building site or construction constitutes a permanent establishment if it lasts for more than twelve months. To avoid double taxation, Austria generally uses the exemption method with progression. However, the credit method applies with respect to dividends, interest and royalties. Tadzhikistan applies the credit method. michael.wenzl@at.pwc.com alexander.wagner@at.pwc.com

5 Tax Treaty between Switzerland and Austria On 13 April 2012, the treaty between Switzerland and Austria on the taxation of income from certain undeclared funds located in Switzerland ( Treaty ) was signed. It is to enter into force on 1 January Basically, the Treaty applies to Austrian resident individuals holding an account or a portfolio with a Swiss paying office as at 31 December 2010 and 31 December Austrian partnerships, companies, private foundations, associations and other corporations do not fall within the scope of the Treaty. With respect to years ending on or before 31 December 2012, Austrian residents may choose one of two options: (i) To be taxed anonymously and render a single payment. Tax claims thus settled will cease to be subject to fiscal penal law. The single payment is to be calculated on the bases of a complex formula (considering the development of the account balance and the duration of the banking relationship) and will amount to 15% to 38% of the relevant capital. (ii) To authorize the respective paying office to report the relevant funds to the appropriate authority. Such report may be considered to be a voluntary self-disclosure within the meaning of Section 29 of the Austrian Fiscal Penal Code. Hence, fiscal criminal liability may be reversed if certain requirements are met. Similarly, for years beginning on or after 1 January 2013, taxpayers may choose to be taxed anonymously at a rate of 25% on capital income or to have their funds proceeds reported to the fiscal authorities. Switzerland will be obliged to report the most important jurisdictions to which undeclared funds have been transferred before the Treaty enters into force. nina.gindl@at.pwc.com martin.spornberger@at.pwc.com What constitutes a permanent establishment? The Austrian Ministry of Finance comments on the minimum time requirement for the existence of a permanent establishment. In a recent letter ruling, the Austrian Ministry of Finance ( BMF ) commented on the minimum time requirement for the creation of a permanent establishment ( PE ). Once a year, an Austrian corporation installs waste processing machinery on the Czech premises of a foreign corporation. After a period of four month, the machinery is uninstalled and brought to another location in a different country. This business practice has been carried out over several years. The Austrian Ministry of Finance was to decide whether the Austrian corporation constituted a Czech PE. In accordance with Article 5 paragraph 1 Double Tax Treaty Austria- Czech Republic, the term PE means a fixed place of business through which the business of an enterprise is wholly or partly carried out. There is no minimum time requirement set out in writing. The applicable commentary to the OECD Model Convention states that a PE is normally assumed to exist if the business has been maintained for more than six months. However, if activities have been of a recurrent nature (e.g. have been repeated over several years), a PE can be deemed to exist even though the individual annual duration has been less than six months. The Austrian Ministry of Finance follows this view: A PE may also be deemed to exist in case of recurring activities at the customer s site in the Czech Republic even if the stay in the Czech Republic is below six months. However, the shorter the stay in the foreign jurisdiction, the longer the recurring periods should be in such a case. A one-time repetition would not be sufficient to create a permanent establishment. g.karatas@at.pwc.com mathias.knittel@at.pwc.com

6 Different tax treatment: Manager of a foreign PE vs. Austrian company s managing director working in the foreign PE The Austrian Ministry of Finance comments on the differences in tax treatment of an Austrian company s managing director working in a German PE and an employee of the Austrian company also working in Germany and being responsible for the German PE as its manager. Letter ruling No deals with a case where an Austrian company maintains a permanent establishment ( PE ) in Germany. An employee of the Austrian company is located in Germany where he is responsible for the German market as manager of the PE. As his working place is in the German PE, he is also subject to (payroll) tax in Germany. The manager is subsequently promoted to managing director of the Austrian corporation. However, he continues to be located in Germany, remaining solely in charge of the German operations. By the mentioned tax ruling, the Austrian Ministry analyses the tax consequences of the promotion. Article 16 para 2 of the Double Tax Treaty between Austria and Germany contains a special rule under which the country of residence of an Austrian company is also entitled to tax the income earned by the Austrian company s managing directors irrespective of the location of the managing directors. As a consequence, after the promotion, Austria becomes entitled to tax the newly appointed managing director s remuneration. This is based on the assumption that the activities of the managing director located in Germany are not also implying that the place of residence of the Austrian company is transferred to Germany (which could happen for instance if he were the sole managing director of the Austrian company). The Austrian Ministry of Finance however states that, under specific circumstances, Germany could also remain entitled to tax: In case the German managing director earns his compensation not in connection with his new capacity as a managing director of the Austrian company but still in relation to his unchanged responsibility for the German market. This should particularly hold if he remains subject to directions by the other managing directors of the Austrian company. alexandra.dolezel@at.pwc.com mathias.knittel@at.pwc.com Expats Crossborder assignment of managing director UFS RV/0488-F/09 The Austrian Independent Fiscal Senate has approved the decision of the tax authority claiming Austrian payroll tax in the following case: Employee X was assigned by his Swiss employer, CHM, to its Austrian subsidiary AT-GmbH (limited liability company). X was as appointed to managing director of AT and worked approximately 2-3 days per week in Austria. X had a business apartment in Austria as a daily return to the Swiss family residence was not feasible. The centre of vital interest and residence as set out in the Double Tax Treaty between Austria and Switzerland was maintained in Switzerland throughout the assignment. CHM recharged the salary costs on a pro rata basis according to the Austrian workdays to the Austrian entity AT on the basis of a passive personnel lease agreement. The local Austrian tax office claimed payroll tax from AT for the Austrian workdays although the 183-day exemption of Article 15 of the DTT Austria Switzerland was not exceeded. The Independent Fiscal Senate approved the assessment of the tax office with the following arguments: The passive personnel lease was made between the Swiss parent company CHM and its wholly owned subsidiary AT. The registered business and main activity of the Swiss company was 6

7 not in the field of personnel leasing. The missing written documentation with regard to length of assignment, definition of new tasks and responsibilities, exemption from prior duties, entitlement to reimbursement of trip expenses, per diems, etc. leads, in the view of the Senate, to the impression that the agreement was not really in place and therefore did not exist as argued. The work of the managing director is executed on the premises of AT, which are therefore under the control and responsibility of AT. The organizational integration of employee X automatically occurs since his position is that of a managing director of AT. Furthermore, X becomes part of and is integrated within the legal and economical business and system of AT since a managing director has to act in the interest of the company he works for. The employment on the basis of an oral or factual employment contract between X and AT (no written contract is available) is much more likely than the informal (third party) engagement via an employment of the Swiss parent company. The application of Swiss labour law and the certified application of Swiss social security (CH/A1 certificate) are of a very minor and therefore irrelevant impact. Considering all the facts and circumstances and due to the lack of written agreements, the Independent Fiscal Senate therefore concludes that there was no assignment and personnel lease of X but that AT-GmbH is the direct employer of X. What is more, no definite proof of the taxation of all salary income in Switzerland was provided by the parties as the final yearly Swiss income tax assessment was not forwarded to the Austrian tax authorities but only the Swiss wage statements which show all salary income (including the salary for the Austrian workdays). Furthermore, the salary costs have been recharged to the Austrian entity and therefore were borne by the Austrian entity. Therefore, the claim for Austrian payroll tax from AT was correct. The Senate states that the fiscal authorities and Ministry of Finance do not have a clear and consistent interpretation of international assignments, but that this situation can be solved and handled by filing an approval request to the competent Tax Office ( 90 Austrian Income Tax Code request). This decision clearly shows that it is very important to document any international assignment of employees through written agreements between the companies involved as well as the employee concerned and to implement the essential criteria accordingly. Otherwise tax authorities have room and basis for tax claims. Author: wolfgang.schneider@at.pwc.com

8 Austrian Tax Facts and Figures Taxation of corporations Corporate income tax rate (Basis adjusted statutory accounts) 25% Non-deductible expenses (examples) Dividend withholding tax 25% Long-term accruals 20% Witholding tax on licences/royalties 20% Business meals 50% Interest witholding tax 0% Excessive car expenses for luxury cars Significant allowances Research & Development (R&D) (premium in cash) 10% Learning & Education (L&E) (Alternatively premiums in cash: 6%) up to 20% Double taxation agreements with 83 countries mainly exemption method International participation exemption for holding companies Conditions: Investments >10%, 1 year holding Dividends and Capital gains 0% Dividend EC portfolio (shares) < 10% 0% Thin capitalization rules None CFC rules None Tax loss carry forwards Losses may be carried forward for an indefinite period of time Usage of tax losses: 75% of taxable income Group taxation valid from January 2005 Consolidation of tax losses with taxable profits Conditions: Qualifying participations > 50% Group agreement and agreement on allocation of cost Losses of foreign participations may be offset against profits of group leader Annual taxable Income Tax Effective Tax Marginal Tax Rate to 11, % 0% over 11,000 to 25,000 over 25,000 to 60,000 Value added tax in line with the 6 th EU directive (EK - 11,000) x 5,110 14,000 (EK - 25,000) x 15,125 35,000 Standard rate 20% Reduced rate (Food, rent, public transportation etc.) 10% VAT refund for foreign enterprises available up to June 30 of the following year and for EU enterprises up to September 30 of the following year. Other taxes Real estate transfer tax 3.5% Capital tax 1.0% Stamp duties - Assignment agreements 0.8% - Rent agreements - Suretyship agreements % 36.50% + 5, % 43.21% over 60,000 (EK - 60,000) x 50% + 20,235 > 33.73% 50% Social security on monthly earnings up to Employer s share up to 21.83% Payroll related taxes approx. 8.0% Employee s share up to 18.07% Income cap for social security contributions, social security totalisation agreements with various states 1.0% 1.0% Contacts PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft Erdbergstraße 200, 1030 Vienna Austria Tel Tax Partners and Directors: Monika Berndl ext Ernst Biebl ext Doris Bramo-Hackel ext Alexandra Dolezel ext Marianna Dozsa ext Peter Draxler ext Margit Frank ext Herbert Greinecker ext Bernd Hofmann ext Martin Jann ext Matthias Kornberger ext Rudolf Krickl ext Kurt Lassacher ext Erik Malle ext Peter Perktold ext Friedrich Rödler ext Maria Schachner ext Thomas Steinbauer ext Thomas Strobach ext Christine Weinzierl ext Rupert Wiesinger ext Christof Wörndl ext Georg Zehetmayer ext ) ext. 2) ext. We encourage feedback on the newsletter and the content. Equally, we welcome any of your thoughts on topics that you would like to see addressed in future issues. Visit our website for archived Austrian Tax News: Copyright and Publisher: PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft, Erdbergstraße 200, 1030 Vienna, Austria Editor: Christof Wörndl, christof.woerndl@at.pwc.com The above information is intended to provide general guidance only. It should not be used as a substitute for professional advice or as the basis for decisions or actions without prior consultation with your advisors. While every care has been taken in the preparation of the publication, no liability is accepted for any statement, option, error or omission. PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.