The Austrian Ministry of Finance published a ruling dealing with the question whether employment income derived from short-term activities at the head office in Austria by employees resident in Italy and working at the Italian permanent establishment are subject to tax in Austria (EAS 3398).

In the case at hand, employees of an Austrian company who were resident in Italy and generally employed at the Italian permanent establishment of the Austrian company performed short-term activities at the Austrian head office. Pursuant to art. 15(1) of the double tax treaty concluded between Austria and Italy ("DTT AT/IT") generally Italy as the state of residence of the employees has the taxation rights on employment income, unless the employment is performed in Austria.

However, art. 15(2) allocates the taxation right exclusively to the state of residence for income derived by a resident of a state (in this case: Italy) in respect of employment exercised in the other state (in this case the income in question was earned from employment at the Austrian head office) if (i) the employee is not present in the source state (in this case: Austria) for a period exceeding 183 days and (ii) the remuneration is paid by, or on behalf of, an employer who is not a resident of the source state, and (iii) the remuneration is not borne by a permanent establishment which the employer has in the source state.

According to the Ministry of Finance, art. 15(2) of the DTT AT/IT, which would leave the taxation right to Italy as the state of residence of the employees despite the employment in Austria, does not apply in the particular situation, as one of the three requirements outlined above is not met: The Ministry of Finance determined that the second requirement, namely that the remuneration is not paid by or on behalf of an employer who is not a resident of Austria as the source state, is not met as the employer is a company resident in Austria. It further held that the Italian permanent establishment cannot be regarded as employer.                     

The ruling further mentioned the decision of the Austrian Supreme Administrative Court on the definition of employer in the meaning of treaty law (cf. case 2009/13/0031). In its decision, the court had ruled that the "employer" within the meaning of treaty law has to be defined by using an economic approach. Nevertheless, the Ministry of Finance stated that the mentioned decision shall not be applicable to the case at hand: Contrary to cases of posting of workers or personnel lease, that usually raise the question whether the "lending company" (usually the employer under civil law) or the "hiring company" is the employer for purposes of applicable double taxation treaties, in the case at hand there is merely one employer who is resident in Austria, having its head office in Austria and a permanent establishment in Italy.

In summary, the ruling stated that Austria as the state of performance of the short-term employment has the taxation right on income earned for employment at the head office, even though the employees were Italian residents and permanently employed at the Italian permanent establishment of the Austrian company.