ROYALTIES UNDER THE DOUBLE TAX TREATY BETWEEN AUSTRIA AND CHINA
A recently issued ruling by the Austrian Ministry of Finance contains interesting comments on the treatment of royalties under double tax treaties (EAS 3397). In the case at hand, a Chinese company had made a lump-sum payment to an Austrian company for technical know-how relating to certain machinery as well as for the pertaining control software.
The Austrian Ministry of Finance stated that in a first step it is necessary to determine whether the payment was made (i) only for the right to use the technical know-how or (ii) rather for the transfer of full ownership of such know-how. In line with case law of the Austrian Supreme Administrative Court (Verwaltungsgerichtshof), a transfer of full ownership can be assumed if the original owner, after receipt of the payment, has no more possibility to make use of the technical know-how (i.e., cannot anymore use the know-how itself or make it available to a third party to use) and if the original owner cannot anymore influence the type of usage of the know-how by the "licensee" (cf. case 87/14/0001). Similarly, para. 8.2 of the OECD Model Commentary on art. 12 states that where a payment is in consideration for the transfer of the full ownership, the payment is not in consideration "for the use of, or the right to use" that property and cannot therefore represent a royalty.
If, in the case at hand, the "licensor" cannot anymore use the know-how in China (but can still use it in the rest of the world), then the Austrian Ministry of Finance will treat this as a sale within the meaning of art. 7 of the OECD Model Convention (business profits). Otherwise, art. 12 of the OECD Model Convention (royalties) will apply. However, even in the latter case it would still be necessary to determine whether the full amount of the payment should be seen as a royalty – since it is conceivable that part of the payment is the consideration for a service to be provided (e.g., after-sales services provided by the Austrian company). In such case, the payment would only partially be treated as a royalty, unless however the consideration for the service were negligible in relation to the total payment made.
Finally, the Austrian Ministry of Finance pointed out that the royalty definition in the double tax treaty concluded between Austria and China significantly deviates from the respective definition in the OECD Model Convention, since the former also includes payments "for the use of, or the right to use, industrial, commercial, or scientific equipment." In this context, pursuant to the Austrian Ministry of Finance, it is noteworthy that the term "equipment" does not necessarily equate to tangible assets.
AUSTRIAN MINISTRY OF FINANCE ON THE TAX TREATMENT OF A TRANSPARENT ENTITY UNDER ITALIAN LAW
The Austrian Ministry of Finance recently published guidance on the tax treatment of a participation in an Italian corporation that is deemed transparent from an Italian tax perspective.
If an Austrian resident individual holds a participation of 50% in an Italian società a responsibilità limitata, which has opted for being taxed as a transparent entity under Italian tax law, the character of the foreign corporation has to be determined under Austrian law. The tax treatment is to be decided on a case-by-case basis according to the guiding principles of the Austrian (Corporate) Income Tax Act.
Primarily it shall be decisive whether the corporation established under foreign law is comparable to a corporation established under Austrian law. Although corporations fulfilling the criteria set out in Annex 2 to the Austrian Income Tax Act of art. 2 of Council Directive 2011/96/EU are regularly deemed to be entities subject to corporate income tax, a comparability test (Typenvergleich) has to be performed nonetheless. If the outcome of such a test evidences a legal entity's conformity with the structure of a specific Austrian company type (such as a limited liability company [Gesellschaft mit beschränkter Haftung] or a limited partnership [Kommanditgesellschaft]), the Austrian tax consequences foreseen for such a company type shall be applicable. In this regard, the qualification of the company or its shareholders under foreign tax law shall – importantly – not be decisive.
From this it can be gleaned that an Italian corporation, which is comparable to an Austrian corporation, does not lose its qualification as a separate taxable entity due to the fact that it is deemed to be a transparent (and thus a non-separate) entity after having exercised the option for transparency from an Italian tax perspective. Consequently, profits may be taxed in the year of accrual in Italy pursuant to art. 7 of the double taxation treaty concluded between Austria and Italy ("DTT AT/IT"), and in the year of distribution in the form of a dividend to the shareholders in Austria pursuant to art. 10 of the DTT AT/IT. From an Austrian perspective, such dividends constitute investment income taxable at a rate of 27.5%. Although this scenario gives rise to economic double taxation (i.e., taxation of the company's profits both in Italy and in Austria), the Austrian Ministry of Finance held that such double taxation is similarly inherent in the domestic legal landscape and is therefore justified. Finally, the Austrian Ministry of Finance stated that the Italian tax levied on the company's profits is not deemed to form part of the dividend distributed to the shareholder. The reason for this is that the amount which was used for paying the Italian tax cannot – from an economic point of view – be considered as having been received by the shareholder.
AUSTRIAN TAX ASPECTS IN CONNECTION WITH HONG KONG TRUSTS
The Austrian Ministry of Finance has recently published information on tax aspects in connection with Hong Kong trusts (EAS 3396).
The Ministry stated that in order to assess Austrian tax consequences in connection with trusts, in a first step it has to be determined by way of a comparability test how a trust is to be qualified for Austrian income tax purposes. While a case by case analysis is always necessary, a trust is generally to be qualified as "assets serving a purpose without having legal capacity" (Zweckvermögen). As a consequence, a foreign trust can generally be seen as being tax resident in Austria if:
- its income is not attributable to a different taxpayer, such as a settlor or a beneficiary (in that respect the general Austrian rules on attribution of income for tax purposes apply); and
- it has an Austrian place of management.
As regards the place of management of the trust, the decisive question is where the essential decisions regarding the management of the trust are factually passed. The fact that one of several members of the board of trustees is an Austrian tax resident does not result in an Austrian place of management of the trust, if the board consists of several members, the board's decisions are effected by simple majority and it does not render its decisions in Austria. Consequently, such trust will only be subject to Austrian corporate income tax on certain types of Austrian source income.
For purposes of the double tax treaty concluded between Austria and Hong Kong ("DTT AT/HK"), a trust set up or registered in Hong Kong qualifies as a Hong Kong tax resident if its place of effective management is not in Austria.
Further, the Ministry commented on the qualification of income received by an Austrian tax resident individual from his or her function as a member of the board of trustees: Art. 15 of the DTT AT/HK on directors' fees would only be applicable by way of analogy if the board member's functions were restricted to mere supervisory functions. In that case, Hong Kong would have the right to tax, with Austria generally having to exempt such income from Austrian taxation, but subject to progression. If, however, fees were paid in order to remunerate the Austrian tax resident individual for functions comparable to those of a managing director, art. 15 of the DTT AT/HK would not apply.
Finally, the Ministry stated that distributions from a Hong Kong trust received by an Austrian tax resident beneficiary are taxable as recurring income pursuant to sec. 29(1) of the Austrian Income Tax Act at the individual's progressive income tax rate. Such income does not qualify as other income pursuant to art. 20 of the DTT AT/HK, but rather as dividends pursuant to art. 10 of the DTT AT/HK. This is due to the fact that the DTT AT/HK does not refer to "corporate rights" in its definition of dividends. Thus, Austria may tax distributions, with Hong Kong's taxation right being restricted to 10%; however, Austria has to credit such Hong Kong source tax.
Even though not stated in the Ministry's information, for the sake of completeness the following should be noted: A one-off distribution, i.e., a distribution not qualifying as "recurring income", should not be taxable at all in Austria.
INCOME FROM SHORT-TERM EMPLOYMENT IN HEAD OFFICE IS TAXED IN SOURCE STATE
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.
TRADING BITCOINS SUBJECT TO TAXATION IN POLAND
On 6 March 2018, the Polish Administrative Supreme Court issued the first ruling concerning taxation of income made from trading bitcoins by individuals (case II FSK 488/16).
According to the ruling, income derived by individuals from trading bitcoins is subject to taxation in Poland at the progressive tax rate. Further, bitcoins should not be considered as a means of payment under Polish tax law. Even though the ruling refers to personal income tax, the approach of the Polish Administrative Supreme Court should be considered as a precedent for Polish tax resident companies as well.
The case at hand was initiated by an individual who applied for a tax ruling from the tax office. This individual was trading bitcoins worldwide, including in Poland. The income was not reported to the tax office. The individual argued that the Polish Personal Income Tax Act should not cover income derived from trading bitcoins. He noted that bitcoins were not even invented at the time the Polish Personal Income Tax Act had been enacted.
One of the individual's arguments was that according to the European Court of Justice (ECJ, C-264/14 – Hedqvist), bitcoins should be considered as a means of payment. However, according to the Polish tax authorities, under Polish law bitcoins cannot be treated as a means of payment, as only Polish Zloty can be treated as such. Moreover, even if trading bitcoins were to be treated as trading a means of payment, such income would also be subject to income tax and progressive rates.
According to the tax authorities, the 19% flat tax rate relevant for individuals running a business activity does not apply to income made from trading bitcoins. Only the 18% and 32% rates are applicable.
AMENDMENT OF SERBIAN TAX LAW
On 14 December 2017, the National Assembly of the Republic of Serbia adopted amendments to a number of tax laws, including the Corporate Income Tax Law, the Value Added Tax Law, the Personal Income Tax Law and the Law on Mandatory Social Security Contributions. The adopted changes have generally been in force since 1 January 2018.
The Corporate Income Tax Law underwent important changes. Banks will benefit from an amendment according to which the write-off of individual loan receivables for loans, which are classified as non-performing loans according to the National Bank of Serbia's regulations, will represent tax deductible expenses for corporate income tax purposes.
Starting from 1 April 2018, the catalogue of services provided by non-resident service providers, which are subject to 20% withholding tax, will be narrowed down. Serbian resident legal entities will have to pay withholding tax only for service fees paid to non-residents providing market research services, accounting and auditing services, as well as other services in the field of legal and business consulting. The Serbian Ministry of Finance has published a new rulebook in March 2018, whereby the list of services provided by non-residents and subject to withholding tax in Serbia is further specified. Further, given that in practice the payment of withholding tax in Serbia was very problematic for Serbian legal entities, the deadline for the payment of withholding tax will be extended, so that withholding tax may now be paid within three days after the payment subject to withholding tax in Serbia has been made (previously, withholding tax had to be remitted on the same day as the payment).
Other amendments include changes regarding the depreciation rules. As an exception from the general rules, the tax depreciation of fixed assets which consists of immovable and movable parts should be classified in tax depreciation groups, which correspond to the classification made for financial accounting purposes. Also, the manner of tax depreciation of intangible assets (e.g., licenses and patents) has been changed, so that now the tax depreciation of such assets will be carried out using the proportional method (instead of the declining method).
There will also be certain simplifications related to transfer pricing rules (e.g., transactions between related parties which are below RSD 8 million do not have to be determined in line with the "arm's length" principle). Related to this, the Serbian Ministry of Finance has published a new rulebook in March 2018 which prescribes safe harbour rates applicable to intra-company loans.
In the area of value added tax, certain changes were introduced related to concession agreements and public-private partnership agreements. Any services provided between the concessionaire and the grantor of the concession will – subject to certain conditions – not be deemed to constitute a supply of services and goods and, thus, will not be subject to VAT in Serbia. Other changes to the Value Added Tax Law include a further alignment of the Serbian rules with the EU rules (e.g., the supply and intermediation in the supply of "investment gold" will be exempted from VAT).
Changes to the Personal Income Tax Law and the Law on Mandatory Social Security Contributions mainly concern clarifications of, and changes to, the existing incentives for employers. For example, newly established companies/entrepreneurs will, starting from 1 October 2018, be exempt from paying personal income tax and mandatory social contributions for up to nine employees for the first 12 months of employment.
Numerous changes to the Personal Income Tax Law concern the taxation of salaries (e.g., increase of the non-taxable amount of salaries from RSD 11,790 to RSD 15,000 and introduction of new tax exemptions for collective life insurance premiums and payment of employees' medical treatment). One noteworthy change is that in the latest amendments it is clearly stipulated that employees seconded from abroad to Serbia are liable to pay salary tax in Serbia.
In line with the amendments to the Corporate Income Tax Law mentioned above regarding the deductibility of banks' NPL write-offs, the Personal Income Tax Law was amended to make clear that such write-offs could not be regarded as income of an individual debtor, and thus, personal income tax would not be payable if a bank writes-off receivables from a client.