Austrian Tax News. Buying agents in Austria A PE. In this issue. Issue 37, October 2012

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1 Austrian Tax News In this issue Direct Taxes Buying agents in Austria A PE risk? by Guelay Karatas and Mathias Benedict Knittel An anonymous ruling from the Ministry of Finance has raised some confusion about the language requirements for Austrian transfer pricing documentation purposes by Alexandra Dolezel and Anna-Sophie Brüser Dividends from a tax exempt Bahrain company Exemption available? by Guelay Karatas and Philipp Sperker Tax treaty update by Maria Hopfenwieser-Molzer and Lukas Bernwieser Indirect Taxes Amendments to the Austrian VAT Act regarding the leasing of immovable property by Christoph Wagner and Maria Wagner Inherent Increase of Land Register Fee and Real Estate Transfer Tax by Georg Zehetmayer and Marko Kovacevic Austrian Tax Amendment Act 2012: Starting in 2013, VAT amounts on Austrian invoices will always have to be shown in euros by Rupert Wiesinger and Josef Wieser ECJ decision on the zero-rating for supplies to airlines operating for reward chiefly on international routes by Verena Grob and Roland Probsdorfer Expats Austrian tax authorities do not strictly apply economical employer concept avoidance of exposure to double taxation of assignee s salary compensation by Wolfgang Schneider Austrian Tax Facts and Figures Buying agents in Austria A PE risk? The Austrian Ministry of Finance recently issued two short letter rulings (EAS 3291 and EAS 3295) on the Austrian tax treatment of foreign buying agents doing business in Austria. The Ministry especially focused on the issue of whether these buying agents might constitute a permanent establishment of the foreign company in Austria. If a foreign company constitutes a permanent establishment in Austria, the part of the company s profit to be allocated to the permanent establishment is taxable in Austria. In general, a permanent establishment is a fixed place of business through which the business of a company is wholly or partly carried out. Double tax treaties regularly exempt auxiliary and preparatory activities from creating a permanent establishment. The decision as to whether a permanent establishment is deemed to exist is heavily influenced by case law and the opinions issued by the Austrian Ministry of Finance. Therefore, uncertainty prevails in certain areas regarding the existence of a permanent establishment. In the first short letter ruling (EAS 3295) issued by the Austrian Ministry of Finance, a German limited liability company (LLC) sends employees to Austria to carry out purchase activities for the German LLC. Irrespective of the working title of these expatriate employees ( regional manager, buying agent, etc.) and of whether office premises are available to them in Austria, the buying agents do not constitute a permanent establishment of the German LLC as long as their functions are limited to purchase activities. The same applies to hired Austrian merchants who buy precious metal in the name of and on account of the German LLC besides their own business. These merchants do not constitute

2 Direct Taxes a permanent establishment of the German LLC either, as long as they are not involved in the sales activities of the German LLC, even if the extent of the cooperation with the German LLC exceeds the ordinary course of their business. In a second short letter ruling (EAS 3291), a US corporation installed two portable offices at the premises of its Austrian (unrelated) supplier where employees of the US corporation ( field service representatives ) were located. These field service representatives undertake quality review tasks for the US corporation in order to ensure that goods purchased from the Austrian supplier meet the quality standards of US customers. The Austrian Ministry of Finance stated that it was to be analyzed in detail whether the quality review at the Austrian supplier could be classified as a purely purchase related function. In such a case, the activities of the field service representatives in Austria would not constitute a permanent establishment. However, a permanent establishment may be created if the quality review fulfils sales promotion purposes. For example, if the customers feel more comfortable buying the end product of the US corporation because of the quality review conducted in Austria, value-adding activities would also be carried out by the field service representatives. As a consequence, the US corporation would constitute a permanent establishment in Austria and would probably have to tax part of its profits in Austria. g.karatas@at.pwc.com mathias.knittel@at.pwc.com An anonymous ruling from the Ministry of Finance has raised some confusion about the language requirements for Austrian transfer pricing documentation purposes The Austrian Ministry of Finance states in EAS 3294 that Austrian country specific transfer pricing documentation needs to be prepared in German. Many multinational companies are following the documentation requirements as set up by the EU Council in June 2006 ( EU masterfile concept ), which however just represent a recommendation (unless specifically implemented under local law by the relevant EU Member State concerned). In Austria, the tax authorities have expressed their willingness to accept transfer pricing documentation set up in accordance with the EU masterfile concept (refer to Item 309 Austrian Transfer Pricing Guidelines). However, Austria has not transposed the EU masterfile concept into local law. The relevant (general) provisions of the Austrian Federal Fiscal Code basically set out that tax related accounts and documentation are to be set up in a living language ; if such language is not at the same time the official language of Austria, the tax authorities are entitled to ask for a legalised translation (refer to 131(1) Item 1 FFC). In the EAS 2394 ruling, the Austrian Ministry of Finance now expresses its view that since so-called masterfiles (which contain the general transfer pricing documentation for the whole group and form part of the complete transfer pricing documentation for the countries concerned, together with the so-called country specific documentation) are generally written in English translations may only be requested by the tax authorities if this is specifically required in extraordinary situations. However, the country specific parts are to be written in the official language of the country, i.e. German for Austria. The Austrian Ministry draws this conclusion on the basis of a provision of the (basically non-binding) EU masterfile which states that country specific legal requirements are to be considered with respect to country specific documentation (Item 9 EU-TPD) and that German is stipulated as the official language in Austria under Art. 8 of the Austrian Federal Constitutional Act. However, the EAS does not contain any reference to the above described lex specialis of 131(1) Item 1 FFC which should basically also allow 2

3 Direct Taxes documents to be prepared in English as English represents a living language. Furthermore, based on initial feedback from the tax authorities, there are to be no initiatives to change the previous practice of basically accepting country specific transfer pricing documentation also in English. Translations into German thus basically only have to be provided to the tax authorities if specifically required. alexandra.dolezel@at.pwc.com anna-sophie.brueser@at.pwc.com Dividends from a tax exempt Bahrain company Exemption available? The Austrian Ministry of Finance has commented on the availability of Austrian tax exemption on dividends distributed by a tax exempt Bahrain company. In a recent letter ruling, the Austrian Ministry of Finance commented on the applicability of the Austrian participation exemption regime to a tax exempt company. In the case at hand, an Austrian corporation held 49% of the shares in a Bahrain company comparable to an Austrian corporation. The distributing Bahrain company was active in the construction business. Under domestic Bahrain law, the company was not subject to corporate tax. The Austrian corporation received dividend distributions from the Bahrain company. In general, dividends received by an Austrian corporation (GmbH, AG) are exempt from Austrian corporate tax, if the Austrian corporation has held at least 10% of the shares in the foreign entity for an uninterrupted minimum period of 12 months (participation exemption regime) the foreign subsidiary is comparable to an Austrian corporation. However, if the foreign company mainly generates income from passive activities (rental income, interest income, royalties, etc.) and is subject to an effective income tax rate of 15% or less, the participation exemption is not applicable. The Austrian Ministry of Finance confirmed in the letter ruling that a foreign corporation is not automatically not comparable to an Austrian corporation if the company is not subject to domestic Bahrain corporate tax. Therefore, provided that the Bahrain company actually carries out operating activities and the profits are to be attributed to the Bahrain company, the participation exemption would be applicable. g.karatas@at.pwc.com philipp.sperker@at.pwc.com

4 Direct Taxes Tax treaty update Austria has signed new revision agreements with Hong Kong, Switzerland and Georgia Hong Kong The purpose of this revision agreement was to update the double tax treaty to the prevailing OECD standards regarding administrative assistance and transparency. In future information exchange requests, the name and address of an alleged information holder are solely required to the extent that this information is known by the requestor. Switzerland The revision agreement signed between Austria and Switzerland most notably aims to loosen the strict Swiss requirements regarding Austrian information exchange requests. In contrast to the OECD Model Convention, the double tax treaty with Switzerland so far stipulated strict requirements regarding the name and address of a suspected tax evader as well as specific information about the required information itself (time period of collection, name and contact details of the owner, etc.). If these requirements were not fulfilled, the information exchange request used to be denied. To avoid impending OECD sanctions, the current revision agreement provides for more general identification requirements. In future, information will also be released if other means to identify the taxpayer are available (e.g. information concerning the bank account number). Furthermore, the revision agreement clarifies that the name and address of an alleged information holder are solely required in the course of information exchange requests to the extent that this information is known by the requestor. Georgia The revision agreement signed between Austria and Georgia has two key elements. On the one hand, the agreement updates Art. 26 of the Austria Georgia double tax treaty to the latest OECD information exchange standards. On the other hand, the amendment of Art. 10 of the double tax treaty stipulates that, in future, dividends paid to corporate shareholders holding at least 10% of the capital will be exempt from dividend withholding tax in the source country. maria.hopfenwieser-molzer@ at.pwc.com lukas.bernwieser@at.pwc.com Indirect Taxes Amendments to the Austrian VAT Act regarding the leasing of immovable property The VAT treatment of the leasing and letting of immovable property has recently been changed (implementation of the Stability Act 2012). As already described in the April 2012 issue of Austrian Tax News, the option to tax the leasing and letting of real estate was restricted. This leads to a number of issues, also regarding the sale of real estate and the restructuring of real estate companies. Before the amendment of the VAT Act, the lessor had the choice between leasing his immovable property with or without VAT. If a lessor opted for taxation, he was allowed to deduct the incurred input VAT (e.g. in connection with the purchase or any repairs of the leased real estate). Stability Act 2012 In case the lessee does not use the immovable property almost exclusively for purposes which entitle the lessee to deduct input VAT (e.g. if the lessee is a bank, insurance company, municipality or non-taxable legal person, etc.), the lessor is to lease the immovable property without VAT. The option in favour of VAT taxation is no longer available to the lessor. Almost exclusively means that the lessee is to use the immovable property at a rate of at least 95% for purposes which entitle the lessee to input VAT deduction. 4

5 Indirect Taxes Consequences of the Stability Act 2012 In case the lessee does not almost exclusively use the leased real estate for purposes which entitle the lessee to input VAT deduction, the application of the new regulation leads to the following: The leasing of the real estate is exempt from Austrian VAT. The lessor is not entitled to deduct input VAT (e.g. for repairs of the leased real estate). The lessor is to correct the input VAT deducted in the past (according to the new law: in the last 20 years) if the lessor has opted for VAT in the past. Application of the new regulation Generally, the new regulation applies to leasing agreements which begin after 31 August 2012 unless the lessor has started erecting the building before 1 September Changing the lessor/lessee after 31 August 2012 is deemed to constitute a new leasing agreement. According to the opinion of the Austrian Ministry of Finance, such changes to the lessor or lessee take place especially under the following conditions: The leased real estate is sold to a new lessor. The leased real estate is donated to a new lessor without consideration. The company which is the lessor or the lessee of leased immovable property is subject to a restructuring under the Austrian Restructuring Tax Act (and the immovable property is moved ). Example: Lessor (Company A) leases a building to a lessee (Bank B). Bank B uses the leased building almost exclusively for purposes which do not entitle Bank B to input VAT deduction. Company A opted for VAT in the past (the leasing started before 1 September 2012). Five years ago, Company A carried out major repairs to the building and deducted the input VAT incurred in connection with the repairs. Company A has by now been merged into Company C. In the view of the Austrian Ministry of Finance, the lessor has changed. Hence, the lessor may no longer opt for VAT and has to lease the building without VAT after the merger. Moreover, the lessor will have to correct the deducted input VAT in connection with the major repairs made five years ago for each year he continues to lease the immovable property without VAT (relevant period: 20 years based on the Stability Act 2012). The interpretation of the Austrian Ministry of Finance, according to which the sale/donation/restructuring results in a new lease agreement, is debatable. In particular the Tax Expert Board of the Chamber for Public Accounting Professions is of a different opinion and argues that such events do not preclude the lessor from opting for VAT taxation. In any case, we recommend reviewing in detail any potential VAT effects of the sale or donation of leased real estate or the restructuring of a company which owns real estate before executing the sale/donation/restructuring. christoph.wagner@at.pwc.com maria.wagner@at.pwc.com Inherent Increase of Land Register Fee and Real Estate Transfer Tax In a series of judgments over recent years, the Austrian Constitutional Court has rescinded several provisions regarding the taxation of real estate transfers on the basis of standard tax values. Taxation on the basis of standard tax values is usually very favourable for taxpayers as the last revaluation occurred in 1971 and the standard tax values are now hence significantly below the market values. The most recent judgment concerned the Land Register Fee and will lead to a significant increase in the costs of real estate transfers. Another judgment is in the pipeline and a legislative response is expected. Land Register Fee Until the most recent decision of the Austrian Constitutional Court the Land Register Fee had to be assessed on the same basis as the Real Estate Transfer Tax: If ownership was obtained by virtue of purchase, the 1.1% Land Register Fee was calculated on the basis of the purchase price. Upon 5

6 Indirect Taxes transfer of ownership without consideration (like donations, inheritances, as well as real estate transfers in the course of business reorganizations) the Land Register Fee had to be assessed on the basis of three times (for business reorganizations: two times) the standard tax value. This preferential tax base is often not more than 20%-30% of the fair value of the real estate and can even be less. In its most recent decision, the Constitutional Court rescinded this preferential base for the Land Register Fee with effect of 31 December For registrations from 2013 onwards the Land Register Fee will have to be assessed on the basis of the market value, triggering a cost increase of roughly 1% on the basis of the fair market value of the real estate transferred. Therefore, any real estate without consideration should be registered with the Austrian land register by 31 December 2012 if possible in order to avoid unnecessary costs. A recent legislative proposal will implement the Constitutional Court s decision. As a general rule the Land Register Fee is to be calculated on the basis of the fair market value, regardless as to whether the ownership was obtained by virtue of purchase or transferred without any consideration. On the other hand the proposal, if enacted, will provide for new relief of certain transactions between relatives, especially in the context of housing and transfers of agricultural real estate: For those qualifying transactions the Land Register Fee will be calculated on the basis of three times of the standard tax value, capped at 30% of the fair market value, even if the transfer is done for fair market value consideration. Real Estate Transfer Tax Another proceeding regarding standard tax values is already pending. The Constitutional Court is going to review the assessment of the Real Estate Transfer Tax on the basis of standard tax values in situations where real estate is transferred without any consideration and it is likely that the Court will rescind this provision. Such a repeal would lead to a significant increase of the generally 3.5% Real Estate Transfer Tax, affecting transfers like inheritances, donations, and also the acquisition of all shares in a corporation owning real estate. However, at this stage it is unclear when the Court will decide and whether a repeal will have immediate effect or there will be a grace period. Standard tax values remain relevant for Real Estate Transfer Tax in cases of business reorganizations The forthcoming decision of the Constitutional Court will not affect the preferential taxation of real estate transfers in the course of business reorganizations as the Austrian Reorganization Tax Act autonomously provides that Real Estate Transfer Tax is to be assessed on the basis of two times the standard tax value. However, future developments in legislation cannot be predicted at this point. georg.zehetmayer@at.pwc.com marko.kovacevic@at.pwc.com Austrian Tax Amendment Act 2012: Starting in 2013, VAT amounts on Austrian invoices will always have to be shown in euros According to the current draft of the Austrian Tax Amendment Act 2012, invoices issued in a currency other than the euro have to show the tax amount in euros. It is planned that the change, which is based on the European VAT Directive, will come into force as from 1 January The change will only affect companies which issue their invoices in a currency other than the euro, e.g. in USD. If the draft is confirmed, there will be solely two ways of converting the tax amount on invoices into euros: either the exchange rate as published by the Austrian Ministry of Finance or the last published exchange rate by the European Central Bank can be applied. This will be an issue for many groups of companies as in practice often a group exchange rate which is centrally predefined is used to convert the VAT amounts into euros. Following the change this will no longer be allowed as from 2013 onwards. Using a different exchange rate will result in over- or underpayments of VAT for the taxable person. On the other hand, an invoice disclosing an incorrect VAT amount may not qualify as a correct VAT invoice and may not entitle the recipient to deduct the VAT. In this case a surcharge of 2% of the VAT deducted will be levied by the tax authorities. Due to the fact that the adjustment of billing processes usually takes some time to be completed and tested, we recommend implementing the changes as soon as possible. Author: rupert.wiesinger@at.pwc.com josef.wieser@at.pwc.com

7 Indirect Taxes ECJ decision on the zero-rating for supplies to airlines operating for reward chiefly on international routes On 19 July 2012 the ECJ decided (C-33/11, A Oy) that the zero-rating for supplies of goods and services rendered to an airline operating for reward chiefly on international routes is in principle also applicable for the supply of an aircraft to a taxable person who does not itself operate the aircraft but provides the aircraft to an airline qualifying for the zero-rating. In the case at hand a taxable person acquired two aircrafts with the intention to provide these aircrafts to an airline qualifying for the zero-rating. Hence, the taxable person applied the zero-rating in accordance with Art. 148 (e) of the VAT Directive on the acquisition of the aircrafts. Based on former ECJ decisions, the zero-rating should have been applicable for direct supplies of goods and services to a qualifying airline only. However, in this case the ECJ stated that the ultimate purpose of the acquired aircrafts is without doubt the use by a qualifying airline. Therefore, the zero-rating is to apply regardless as to whether the supply was directly carried out to a qualifying airline or to an intermediate taxable person. The ECJ furthermore decided that the zero-rating according to Art. 148 (e) of the VAT Directive is also applicable for airlines rendering charter flights only in case the airlines meet the requirements for the zero-rating (i.e. operating for reward chiefly on international routes). Another remarkable point of this decision is that the zero-rating also applies if the airline renders its services mainly to one individual, who is a shareholder of the airline, if there is also an opportunity for the airline to render its services to other individuals. verena.grob@at.pwc.com roland.probsdorfer@at.pwc.com Austrian tax authorities do not strictly apply economical employer concept avoidance of exposure to double taxation of assignee s salary compensation Expats When defining the employer according to Article 15 of the OECD model tax treaty and corresponding Double Tax Treaties, the Austrian tax authorities do not strictly follow the economical employer concept but instead adhere to the legal employment arrangement even if the salary costs are recharged. As for most other countries, it is sufficient for the employer definition that the compensation is recharged to the entity and that there is a risk that in scenarios of short term assignments via a passive lease agreement of up to 183 days double taxation will arise. The Austrian Ministry of Finance has considered the new commentary of the OECD model tax treaty and published the following rules in the Protocol of the Salzburg meeting on international tax issues held from 7 to 10 May 2012, which summarise the opinions expressed in EAS 3201 and 3271: In case the other State claims a taxation right on the basis of the economical employer concept, an exemption from Austrian taxation can be applied within the EU or with countries outside the EU in case a Double Tax Treaty with Austria exists, provided the exemption method is used. What is required is that an authorised tax advisor or lawyer of the other Host State confirms that: According to local law a switch of employer takes place for tax purposes in case of a personnel lease from the lessor to the lease. The local host law regulation and, if applicable, the administrative regulation or ruling defining the switch of employer has to be stated in the official confirmation The confirmation has to be issued in the local official language and, if applicable, has to be translated into German, English or French. The switch of employer takes place not only in case of a lease of personnel from abroad but also for the lease of personnel within the Host State where an assignee is transferred from one location to another location within the Host State and a switch of employer takes place as the costs are charged from one entity to another entity of the Host State. If it is not possible to obtain such confirmation, an exemption from double taxation can only be achieved by filing a mutual agreement procedure in accordance with the applicable Double Tax Treaty. 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 Peter Hadl ext Bernd Hofmann ext Martin Jann ext Aline Kapp 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. 3) 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.