New PE definitions of the Austrian Ministry of Finance

With the publication of the Austrian Transfer Pricing Guidelines 2021, the most recent developments on an OECD level related to the definition of a permanent establishment (PE) were partially implemented in Austrian taxation practice.
 

PE definition in Austrian and international contexts

Austrian tax law defines the existence of a PE in several different ways:

• For example, for corporate income tax (CIT) purposes, a PE is defined as a “fixed piece of equipment, facility or place, which serves the operation of an enterprise or a commercial business enterprise”. According to previous administrative practice, it is a requirement that the plant or facility is “situated under the power of disposal of the company on a permanent basis”.
• • Another definition of relevance for foreign employers is, however, the so-called ‘wage tax PE’, which can be assumed to exist if the fixed piece of equipment, facility or place is maintained by the employer in Austria for a duration of more than one month. Unlike the corporate income tax PE, the wage tax PE is not limited by the existence of a bilateral double taxation treaty (DTT).

While the Austrian definition is characterized by a ‘fixed place’ element, the definition under treaty law (see Article 5 OECD Model, in place of the respective DTT) make a distinction between the fixed place PE (“fixed place of business through which the business of an enterprise is wholly or partly carried on”) and the dependent agent PE, which is linked to natural persons.
In both Austrian domestic law and treaty law, it is clear that a fixed place of business needs to be established for a certain period of time (usually more than six months) in order to fulfil the PE definition. This six-month period applies in the case of intercompany assistance services (active services) and, if exceeded, leads to the creation of PE for the foreign employer. For mere intercompany personnel leasing (passive services), this is not the case, and this does not generally lead to a PE of the employer being assumed.

De-facto power of disposal – the ‘painter example’

The OECD has said that an enterprise must have a de-facto power of disposal over the place of business, which exceeds occasional use or the mere possibility of shared use and is of a permanent character.
A new aspect in this context is that a de-facto power of disposal is created by regular, permanent presence, as in the case of a painter who carries out painting activities for his primary customer three times a week for two years. In this way, the Austrian Ministry of Finance (MoF) has significantly extended the PE definition and amended it to correspond to the OECD view. It is unclear from which tax year the extended definition will begin to apply.

• The MoF does not deem a power of disposal to exist if a business representative regularly visits a procurement manager at his premises to collect orders (this example is unfortunate, as this situation could be associated with the risk of a dependent agent PE – see below).

Special case: (Flexible) workplace in an open-plan office

It has been clarified that it is sufficient to have de-facto power of disposal over a fixed, separate space, for which reason the permanent allocation of an individual or flexible workspace in an open-plan office can also lead to the creation of a PE. In practice, this leads to an increased PE risk when carrying out work for Austrian customers on their premises.
 

Special case: Home office PE

In connection with activities from a home office which are not merely occasional but permanent, and which are carried out in agreement with the employer, the employer can obtain a de-facto power of disposal over the private home of the employee, meaning that home office activities can create a PE. The exceptions for preparatory or auxiliary activities should be taken into account.

• It has now been explicitly determined that home office activities of an employee of less than 25% of working time (e.g., one day per week) do not typically fulfil the criteria of permanency. However, if a home office is used for more than 50% of working time, a PE shall exist in any case. Thus, there is still a lack of clarity regarding the grey area between 25% and 50%, as well as regarding the formal requirements to demonstrate consultation with the employer.
• The previous view of the MoF, in accordance with which private homes of employees can constitute a PE irrespective of the amount of working time spent there, continues to apply. In this case, the home must have external significance for the company, such as serving as a base for order fulfilment, an address for business correspondence, or if used (physically) for meetings with customers.

Special case: Dependent agent PE

An agent can create a dependent agent PE if there is a dependency relationship under treaty law between the agent and the enterprise that is represented, and if the agent has an economic power to make sales or de-facto power to conclude contracts. The latter criterion is fulfilled if the agent has the right to conclude contracts on behalf of the enterprise.

• A new factor, in addition to the existence of a power of representation, is the reference to the economic dimension. It is necessary to check whether the agent habitually concludes contracts, or plays a principal role leading to the conclusion of contracts, and whether the contracts are concluded in the name of the company, and whether they are contracts for goods, usage rights, or services of the company, which are concluded by the company on a regular basis without significant changes. In practice, this leads to a higher risk of a dependent agent PE being created.
• The previous view of the MoF still applies, in accordance with which a company officer-holder (managing director) of a corporation is able to create a dependent agent PE if all the hallmarks are fulfilled.

What will the future bring?

It remains to be seen what effect the new definitions will have in practice, and whether these will also apply to (mere) wage tax PEs. With regard to the latter, further definition is anticipated in the Austrian Wage Tax Guidelines. We will inform you about this as soon as reliable information is available.