Austria: Withholding tax liability for advisory services of foreign companies

The Ministry of Finance has announced that Austrian companies purchasing advisory services from foreign companies may be subject to withholding taxes. Pursuant to the Austrian tax law, income from commercial or technical services rendered by foreign companies is subject to income taxation. In the case of countries with which Austria has concluded a double taxation agreement (DTA), this tax is generally only due if the foreign advisory company operates through a permanent establishment.
Under the Austrian definition a permanent establishment is given if the company has a fixed place of business in Austria in which a commercial activity is performed over a certain period of time. Over recent years, however, the international definition of permanent establishment has changed giving way to less strict requirements in terms of location and time of existence.
In a case going back to last September, an Austrian company had received advisory services from a foreign company that did not have an office of its own but instead was only given access to general meeting rooms. The Ministry of Finance stated that according to the DTAs a permanent establishment did exist, although according to the Austrian laws this was not the case since the company did not have power of control over these rooms.
Since the Austrian laws do not require any registration if a permanent establishment does not exist, the Austrian company purchasing the services has to deduct withholding tax. However, the company subject to limited taxation may request an assessment of income tax based on the actual profits of the Austrian service company.
Several DTAs allow for the taxation of services even if no permanent establishment exists. These agreements provide that a permanent establishment already exists if services are rendered over a longer period of time in the country where the company is operating. The period during which the service is performed must exceed six months within one year. A permanent establishment, however, is not founded in the case of the mere cross-border rendering of services.
This development is a further sign for the trend towards the movement of the taxation of services to the country in which these services are actually rendered. In these cases there will have to be established on a case by case basis if the foreign company needs to be assessed or if the Austrian company purchasing the services has to deduct withholding tax.


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