BMF information on the application and interpretation of Double Tax Treaties
The COVID-19 pandemic has implications for the taxation of income of cross-border workers, as the allocation of taxation rights under tax treaties depends, among other things, on where the the activities are carried out. The duration of activities and the length of stay in a country are decisive factors for taxation and the creation of permanent establishments. The information provided by the Austrian Ministry of Finance (BMF) is intended to solve issues related to new questions about the interpretation of DTAs arising in connection with COVID-19.
1. Tax treatment of employment income in connection with home office activities
If an employee works from home in a different country (e.g. during an international assignment or secondment), the relevant double taxation agreement (DTA) applies. For employment income, DTAs generally envisage taxation in the state of residence (= the state in which the “centre of vital interests” is located). If the employee carries out activities from a different DTA partner state, the right to tax is usually split on a pro-rata basis (unless the “183-day rule” applies). Subsequently, the state of residence must grant tax relief for the income which the partner state is entitled to tax, in order to prevent the risk of double taxation.
Changes in taxation rights may occur a result of the COVID-19 pandemic, and the associated obligation of many employees to temporarily interrupt international assignments and work from home, which would not have been the case in normal circumstances. According to the BMF information, the distribution of remuneration between the state of domicile and the state in which activities are carried out should still follow standard rules on allocation. Deviations from this principle only apply in cases in which Austria has a separate bilateral agreement containing different rules, as in the case of Germany (read more). In this case, and in deviation from the standard rules, taxation can be allocated based on fictive working days.
Clarification has also been provided in relation to existing rules on cross-border workers in the DTA with Liechtenstein. This normally envisages that an individual only counts as a cross-border worker if they live and work close to the border and “usually” cross the border each working day. If workday commuting of this kind was prevented by COVID-19, the individual will not lose their status as a cross-border worker.
The DTA with Italy contains a comparable rule on cross-border working. However, a solution has not yet been agreed and consultations are still ongoing.
2. Tax treatment of wage subsidies during short-time working
Financial support during short-time working is a partial, state-subsidised wage subsidy to cover the reduction in working hours. It is applied for by the employer (as a short-time working subsidy) and is subsequently treated as a “normal” wage component in payroll accounting.
In line with OECD recommendations (Paper of 3 April 2020; see our report here), the allocation of taxation rights in accordance with the DTA should generally be decided based on the situation which would have applied if the COVID-19 crisis had not taken place. The allocation should therefore be made based on fictive data (e.g. contractual arrangements or comparable historical data).
Exceptions apply if the relevant DTA contains a special scheme for income from mandatory social security payments, as is the case for Germany. Accordingly, it may be necessary to tax the short-time working subsidy in full in the state which pays the subsidy. When implementing this in payroll accounting, it should be taken into account that any state subsidy amounts included in wages may require different tax treatment to “normal” wage components. For correct treatment in payroll, the BMF suggests allocating short-time working subsidy to calendar days by determining the relationship of the subsidy to total remuneration and applying this to the relevant calendar days in the remuneration period.
3. Permanent establishments
Due to the COVID-19 prevention measures, many employees have for several months been unable to carry out their activities at the location at which they would normally have worked before the pandemic. In cross-border circumstances, this can lead to undesired changes in taxation rights between states – for example, due to the creation of permanent establishments (PEs). The Austrian Ministry of Finance provided information on this issue on 22 May 2020, although the Ministry of Finance generally supports the view of the OECD Secretariat (Paper of 3 April 2020; see our report here).
Home office PEs
- If employees work from home during the COVID-19 pandemic due to government recommendations in the relevant country, the Austrian Ministry of Finance does not deem this to be sufficient to create a permanent establishment within the meaning of Art. 5 OECD Model Tax Convention because the location lacks permanency and is not at the disposal of the employer.
- However, different rules apply if home office activities become the new norm after COVID-19, or if activities were partially completed from home before the restrictions entered into force. In cases such as these, a detailed analysis of PE risks is recommended.
Construction site PEs
- Unless bilateral agreements stating otherwise, the Austrian Ministry of Finance does not generally envisage any changes to the applicable periods for construction site PEs (usually twelve months) if construction is interrupted due to COVID-19.
- The Ministry of Finance has made clear that this also applies if a construction project was commissioned in several separate phases and the relevant periods are subject to bilateral DTA provisions (e.g. as is the case for Germany, Switzerland, or the Czech Republic). In these cases, the periods in which construction did not take place between the work phases do not have to be included in the calculation period for construction site PEs. In our view, this leads to the following conclusions:
- If work during a construction phase was interrupted due to COVID-19, the downtime must be included when calculating the periods for construction site PEs.
- However, if the COVID-19 restrictions merely extended a period without construction work between separate construction phases, this time does not need to be included when calculating the periods for construction site PEs.
- In the case of Germany, bilateral consultations are currently being held regarding a possible interruption of the period for construction site PEs.
- The recommendations on home offices of the relevant national authorities need to be documented, particularly the end date of any temporary measures.
- It is still unclear how the relevant periods should be calculated and how the Austrian Ministry of Finance will assess the end date of COVID-19 measures in other countries (e.g. after borders have been re-opened, but measures on physical distancing in offices remain in place, and a portion of the workforce continues to work from home).
- Unlike the OECD analysis, the Ministry of Finance information of 22 May 2020 does not contain any statements on agency PEs and the COVID-19 restrictions. In our view, it is advisable to carry out a detailed analysis.
- In accordance with the information available to use, consultations are currently ongoing with various neighbouring states, which may eventually lead to additional relief measures, which will need to be reviewed on a case-by-case basis.
It is to be welcomed that the Austrian Ministry of Finance has now clarified various issues related to COVID-19 and generally shares the view of the OECD Secretariat. Furthermore, the Ministry of Finance intends to update the information of 22 May 2020 on a regular basis to include any new developments. It remains to be seen whether the next update will contain specific information on how to calculate the relevant periods, as well as on the date at which the Ministry of Finance will deem the COVID-19 measures to have ended. We therefore recommend monitoring the current location of employees and where they carry out activities for the company, especially during travel restrictions due to COVID-19, in order to review possible arrangements in a timely manner and fulfil all registration and compliance obligations on time.