Right on time before the start of the summer season, the Austrian Ministry of Finance dealt with the question whether services performed on a sailing boat located in Croatia may constitute a permanent establishment in the meaning of the applicable double tax treaty.
Pursuant to art. 7(1) of the double tax treaty concluded between Austria and Croatia ("DTT Croatia"), the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business through a permanent establishment in the other state, profits of the enterprise may be taxed in the other state to the extent attributable to that permanent establishment. Similarly, the DTT Croatia in its art. 14(1) – dealing with income derived from professional services or other activities of an independent character – requires a fixed base regularly available to the taxpayer for the purpose of performing these activities. A permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried out (cf. art. 5(1) of the DTT Croatia); a fixed base has the same meaning as a permanent establishment.
In the case at hand, an individual resident in Austria provided skipper trainings and courses for obtaining the Croatian sailing license. The practical trainings took place on the trainer's sailing boat in Austria, while training sails were performed on a rented sailing boat in Croatia.
In order to determine whether the sailing boat used in Croatia constituted a permanent establishment for the Austrian trainer, the Ministry of Finance first examined whether the boat itself meets the necessary criteria for a permanent establishment (EAS 3413). Normally, a sailing boat does not establish a permanent establishment, since the connection to a specific point of the earth's surface – and thus the local element – is missing, unless the operation of the ship is restricted to a particular area that has commercial and geographic coherence (cf. OECD Model Commentary, art. 5 para. 26).
The local element may, however, be met if the trainer had a fixed pier for the Croatian sailing boat at his disposal. In case such a fixed pier is used for performing business activities (i.e., it meets the functional element) and in case it is permanently available (i.e., it meets the temporal element) a permanent establishment pursuant to art. 5 of the DTT Croatia could be constituted. In this respect, it is not required to use the fixed place of business continuously, it is also regarded as sufficient if it is used on a recurring basis throughout a longer period of time. Finally, the Ministry of Finance pointed out that the pier as a fixed place of business would not constitute a permanent establishment if it served the performance of merely ancillary services.