Guest author Dr Gerald Toifl
Austria's tax treaty policy objectives are much broader than the mere elimination of double taxation.
Austria has a dense tax treaty network of more than 90 tax treaties, including all Member States of the European Union and Liechtenstein.
The Austrian tax treaty policy is significantly influenced by the fact that international double taxation is, for Austrian residents, already removed on the basis of domestic law that ensures the elimination of double taxation in relation to all countries in the world; ie. also to countries with which no treaty exists.
So why is there further need for Austria to conclude tax treaties?
The answer is that the target of the Austrian tax treaty policy is much broader than the mere elimination of double taxation. Austria enters into double taxation negotiations also with the following two objectives:
- promotion of economic development, and
- legal certainty for Austrian investors in the foreign country.
In other words, Austria believes that tax treaties generate stimulating effects on the development of bilateral economic relations.
However, Austrian tax treaty policy does not only focus on resident taxpayers and their foreign investments. As Austria also has a substantial interest in domestic investments from abroad, it is essential to protect foreign investors from double taxation both in Austria and in their home countries. Consequently, Austria is also concerned with ensuring double taxation relief for the outbound flow of non-residents, which can only be provided under a tax treaty.
Promotion of International Economic Relations
Austria is a classical "exemption country". Also under domestic law, economic double taxation is not eliminated by giving (indirect) credits but by exempting the receiving company from tax on dividends under the participation exemption regime. Already at the level of domestic law, this concept applies both to domestic and foreign dividends. Against this background the exemption method is also the predominant method for the avoidance of international double taxation under Austrian tax treaties.
As a result, when Austrian companies expand their business operations to foreign countries and set up foreign branches or subsidiaries, they enter into competition with local enterprises. If the tax burden in foreign countries is lower than in Austria an application of the credit system would create a competitive disadvantage for Austrian companies, as their foreign income would become subjected to the higher domestic level of taxation. This result is avoided by using the exemption method.
The fact that some Austrian tax treaties are nevertheless based on the credit system is simply due to Austria's former tax treaty policy, under which the principle of reciprocity is applied. Whenever in the past during treaty negotiations, the other country insisted on the application of the credit system, the Austrian method for the avoidance of double taxation was the credit system as well. In that respect, however, the Austrian treaty policy has changed. It is not regarded a valid argument any longer that if a foreign country treats its own residents in an unfavourable manner, that Austria should do the same with its resident taxpayers.
Avoidance of Source State Taxation
The restriction of foreign taxation on permanent establishment income is the first key issue in Austrian tax treaties. Therefore, the protection of Austrian companies against foreign taxation on their cross-border transactions without using a foreign permanent establishment is governed under all Austrian tax treaties.
Also foreign investors, which set up an Austrian company, can benefit from this concept as they are recognised as Austrian resident taxpayers, which fall under the scope of all Austrian tax treaties.
Already under Austrian domestic law, not only dividends from foreign subsidiaries but also capital gains on the sale of the participation in such a subsidiary are tax-exempt. In order to uphold this concept also in relation to Austria's tax treaty partners, the adoption of the principles of Article 13 of the OECD MC is the second key issue for Austria when negotiating a tax treaty with another country. The result is a source tax exemption for the alienation of foreign participations. Furthermore, this enables tax neutral restructurings of enterprises under the Austrian Reorganisation Tax Act.
The third key issue under Austrian tax treaties is a far-reaching relief from source taxation on dividends, interest and royalties. With respect to dividends, the reasons underlying the EU Parent Subsidiary, Interest and Royalties Directives guide Austria's treaty policy also in relation to non-EU-countries. Therefore, in the course of treaty negotiations Austria also deviates from the OECD concept. The idea is that profits that have been taxed at the level of a subsidiary shall flow free of tax into the hands of its parent company; taxation shall take place neither in the source state nor in the residence state. Against this background, it is also one of the predominant objectives in the Austrian tax treaty negotiations to reduce source tax on interest and royalties wherever possible, down to zero.
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