AUSTRIA: Does a sailing boat constitute a permanent establishment?
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.
AUSTRIA: Exchange of country-by-country reports with the USA
As recently reported by the Austrian Ministry of Finance, the competent authorities of Austria and the USA have concluded an agreement on the exchange of country-by-country reports.
Pursuant thereto, the competent authorities shall exchange annually and automatically the country-by-country (CbC) reports received from reporting entities if, on the basis of the information provided in a CbC report, one or more constituent entities of a multinational enterprise (MNE) are tax resident or have a permanent establishment in the respective other state.
CbC reports shall be first exchanged with respect to fiscal years of MNE groups commencing on or after 1 January 2016. The exchange shall generally be effected as soon as possible, but no later than 18 months after the last day of the fiscal year of the MNE group. For example, in respect of fiscal years ending on 31 December 2018, a CbC report shall be exchanged by 30 June 2020 at the latest.
AUSTRIA: Mutual agreement regarding the frontier worker clause with Germany
The double taxation treaty concluded between Austria and Germany contains a special provision deviating from the OECD Model Convention on the tax treatment of remunerations for employees living and working across the border (so-called frontier workers). Certain open questions have now been jointly addressed by the Austrian and German competent authorities.
In general, the double taxation treaty concluded between Austria and Germany ("DTT Germany") provides that salaries, wages and other similar remuneration derived by an employee who is a resident of one contracting state and who exercises their employment in the other contracting state, shall be taxable in both states. However, in case of so-called frontier workers, only the state of residence shall have the taxation right regarding such income. Frontier workers are defined as persons (i) residing in the frontier zone of one contracting state; (ii) exercising their employment in the frontier zone of the other contracting state; and (iii) returning daily from the place of employment to the place of residence.
Austria and Germany have now reached consensus on the following interpretation:
- The frontier zone comprises a border strip of 30 km along the border and is calculated on the distance as the crow flies rather than on the number of road kilometres.
- The establishment of a secondary residence within the border zone generally does not suffice for the application of the frontier worker regime.
- If the frontier worker fails to return to the place of residence on a daily basis or if he/she is exceptionally employed at places outside the frontier zone, the status as a frontier worker shall not be lost provided that the frontier worker is employed throughout the calendar year and the days of non-return / employment outside the frontier zone do not exceed a threshold of 45 days.
- Days on which the frontier worker exercises their employment (i) in the state of residence; (ii) in the other contracting state but outside of the border zone; or (iii) in a third state are to be regarded as non-return days, provided that the frontier worker stays there for more than half of the daily working time.
- Sickness or vacation days as well as days of parental leave are not to be qualified as non-return days. However, days on which the employee does not cross the border due to working at home are to be qualified as non-return days.
This joint interpretation will be applied by the Austrian tax authorities to all pending cases.
AUSTRIA: New Double Taxation Treaty with Japan
Since January 2019, a new double taxation treaty between Austria and Japan is applicable, replacing the former treaty dating back to 1961.
The new double taxation treaty between Austria and Japan ("DTT Japan") brings some notable changes, the most important of which are as follows:
- A new tie-breaker rule states that where a person other than an individual is a resident of both contracting states, the two competent authorities shall endeavour to determine by mutual agreement the contracting state of which such person shall be deemed to be a resident (having regard to its place of effective management, its place of head or main office, the place where it is incorporated or otherwise constituted and any other relevant factors). In the absence of an agreement, such person shall not be entitled to any relief or exemption from tax provided by the DTT Japan.
- Concerning withholding tax, the general rate on dividends has been decreased to 10% (from 20%). Further, dividends shall be fully exempt from withholding tax if the beneficial owner of the dividends is (i) a company which has owned directly or indirectly at least 10% of the voting rights of the company paying the dividends for at least six months before the date on which entitlement to the dividends is determined; or (ii) a pension fund. Also, the possibility to withhold tax on interest (with certain exceptions) and royalties was abolished.
- An important change has been introduced concerning the taxation of capital gains from the alienation of shares: Such capital gains shall be taxable only in the contracting state of which the alienator is a resident. As an exception, capital gains derived from the alienation of shares of a company or comparable interests may be taxed in the other contracting state if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in that other contracting state, unless such shares or comparable interests are traded on a recognised stock exchange and the resident and persons related to that resident own in the aggregate 5% or less of the class of such shares or comparable interests.
- A so-called "entitlement to benefits" clause has been included in the DTT Japan, which provides that the reduced withholding tax rates only apply to certain qualified persons. Also, a benefit under the treaty shall not be granted if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.
- Regarding the elimination of double taxation, for residents of Austria generally the exemption method applies, while for residents of Japan the credit method is applicable.
- Finally, the DTT Japan introduces mandatory arbitration: If a person has presented a case to the competent authority of a contracting state on the basis that the actions of one or both of the contracting states have resulted for that person in taxation not in accordance with the provisions of the treaty and if the competent authorities are unable to reach an agreement to resolve the case within two years, any unresolved issues shall upon request be submitted to arbitration.
Routing US inbound financing through Hungary
After a long history of being a preferred location for financing companies, recent experience shows that Hungary seems to become attractive again for intra-group financing structures. International attention towards Hungary is being fuelled by recent changes in US anti-hybrid rules.
The last US tax reform has introduced a number of rules (e.g., the so-called BEAT legislation) to keep taxpayers from eroding the US tax base. Inter alia, these rules have significantly impacted the intercompany financing of US inbound investments by foreign companies, which had so far used structures involving debt-financing. This allowed them to reduce their US tax burden by securing a tax deduction, and to avoid incurring US withholding taxes on outbound cash flows. In order to ensure the effectiveness of the provisions cracking down on such structures, anti-hybrid rules have been implemented, which stipulate that deductions for any interest or royalty paid or accrued amongst related parties or pursuant to a structured arrangement fall within the scope of the US anti-hybrid rules and, in turn, are denied to the extent they are considered to be disqualified hybrid amounts, disqualified imported mismatch amounts or payments subject to the anti-avoidance rule.
The legislation aims to curtail the advantages of financing structures resulting in a deduction/no-inclusion outcome by utilizing hybrid mismatches. However, some planning leeway is still available, e.g., by applying structures that benefit from the favourable double tax treaty between the US and Hungary ("DTT Hungary/US") and make use of a jurisdiction that operates a tax regime not taxing foreign source income. In such a structure, the financing company is resident in Hungary and provides a loan to a US subsidiary through a branch located in a jurisdiction that operates a territorial tax regime and has a treaty with Hungary based on which Hungary may not tax the income attributable to the branch (e.g., Hong Kong, Uruguay, Singapore, etc.). The DTT Hungary/US neither provides for withholding tax on interest payments nor contains a "limitation on benefits" clause. This structuring results in no US withholding tax being levied on the interest paid by the US subsidiary to the branch. The branch jurisdiction does not tax the foreign source interest income attributed to the branch. Hungary does not tax the interest income attributed to the branch, either. Distributions from the Hungarian finance company to the foreign parent company are also not taxed by Hungary since it does not levy withholding tax on interest payments, dividends or royalties paid to companies.
In addition to the branch structure, Hungary is often used just as a low tax jurisdiction where a financing company can be established. In this very simple structure, the tax savings arise due to the different corporate income tax rates between the US (21%) and Hungary (9%).
(Janos Pasztor / Bence Kalman)
Hungary: Summer tax package
On 4 June 2019, the so-called summer tax package was submitted to the Hungarian Parliament. The package mostly aims at implementing various EU directives.
The new rules will, inter alia, cover the following:
- exit taxation to prevent companies from avoiding tax when relocating assets, business operations or their place of effective management from Hungary;
- rules addressing hybrid mismatches which will result in a deduction being denied to avoid deduction/non-inclusion and double deduction outcomes;
- new VAT rules for call-off stocks and chain transactions;
- a regime providing relief from VAT on bad debts with a view to a decision of the ECJ (case C-246/16 – Enzo Di Maura);
- a procedure enabling customers to recover unduly invoiced VAT from the tax authority in instances where they would otherwise not be able to reclaim such VAT in light of two judgments of the ECJ (cases C-564/15 – Tibor Farkas and C‑691/17 – PORR Építési Kft.); and
- a 0% rate for tax on advertisement turnover between 1 July 2019 and 31 December 2022 instead of the currently applicable flat-rate. To this end, we note that in the recent decision of 27 June 2019, the General Court annulled the Commission's decision finding that the Hungarian advertisement tax was incompatible with the EU State aid rules.
(Janos Pasztor / Bence Kalman)
Poland: New rules regarding exemptions from withholding tax
On 1 January 2019, a significant amendment to the Polish Corporate Income Tax Act came into force introducing restrictions in the application of withholding tax exemptions and beneficial rates.
The new provisions move the burden of proof in relation to withholding tax to Polish tax residents who pay interest, dividends, royalties and fees for marketing or advisory services. Certificates of residence and statements of beneficial ownership are no longer sufficient to apply preferential withholding tax rates or to be fully exempt from paying withholding tax.
The scope of the additional burden of proof depends on the accumulated annual amount of interest, dividend, royalty or service fee payments to one recipient. If this amount exceeds PLN 2 million (approx. EUR 500,000), the payer is obliged to withhold 20% (for interest, royalties and service fees) or 19% (for dividends) with respect to payments exceeding PLN 2 million (approx. EUR 500,000) and has to transfer this money to the tax office. To be in line with double tax treaties, the EU Parent/Subsidiary Directive and the EU Interest/Royalties Directive, the Polish tax authorities shall refund any withholding tax within six months of an application.
There are, however, two ways to avoid paying these withholding tax rates and to benefit from existing relief at source rules:
- The first option is receipt of a binding tax opinion, which is reserved for interest, royalties and dividends under the EU Parent/Subsidiary Directive and the EU Interest/Royalties Directive. This opinion is to be issued by the tax authorities at the request of the payer or taxpayer (to be sent electronically) and is valid for a period of three years.
- The second option is to notify the tax authorities electronically using the WH-OSC form. Such statement must be sent before the income is paid to the foreign recipient. For regularly occurring payments such as interest, royalties and service fees, the statement is valid until the end of the second month from the date of its submission. In the statement, the payer has to confirm that the recipient of the income is the beneficial owner of the payment and that the other requirements for a withholding tax reduction or exemption are met. The statement must be signed by management board members.
Non-compliance with these new rules can trigger personal penalties for the members of the management board as well as an additional tax liability for the Polish tax residents who pay interest, dividends, royalties and fees for marketing or advisory services.
Due to the number of procedures to be completed under the new withholding tax regime by both the tax administration and taxpayers, the tax authorities moved the starting date of the new obligations and procedures to 1 July 2019. Nonetheless, the threshold of PLN 2 million (approx. EUR 500,000) needs to be calculated already from the beginning of this year.