What should be considered in cross-border employment contracts?
Whether you work for an employer abroad, are seconded to a foreign company or work remotely from outside Austria, all these complex situations raise the question of which country should tax your employment income. Austria has entered into “Double Taxation Agreements” (DTA) with numerous countries for such cases.
1. Tax liability and tax residence
Your worldwide income is taxable in the country where you are resident for tax purposes. You are considered resident for tax purposes in the country where you have your residence or centre of vital interests. If you only have one residence, it serves as an important indicator. This can also include subletting or a hotel room rented long-term. If you have residences in multiple countries, your tax residence is typically in the country where the centre of your vital interests is located. The centre of vital interests refers to the place where your personal and economic ties are strongest (often the family residence).
Important note: If you establish a new residence abroad while (temporarily) retaining your Austrian residence, the Austrian tax authorities generally consider your tax residence – and thus the taxation right on your worldwide income – to remain in Austria for at least two years. We are happy to assist you if you have any questions regarding such matters.
If your centre of vital interests remains in Austria, in general, Austria has the right to tax income generated abroad. In order to avoid double taxation of income generated abroad, corresponding provisions were made in the Double Taxation Agreements (see also 2. Avoidance of double taxation).
Income is generally taxed in the country where the activity is physically performed – referred to as the “country of activity”. In addition to this basic rule, most Double Taxation Agreements have additional provisions that assign the taxation right to either the country of residence or the country of activity. According to these special provisions, the country of activity may not have the taxation right if the employer does not maintain a branch or permanent establishment in that country and the employee is physically present in that country for less than 183 days. If any of these requirements are not met, the country of activity has the right to tax from the first day. If all requirements are met, the whole income is to be taxed in the country of residence.
Special case: working from home abroad
If your centre of vital interests is in Austria, you work for an Austrian company and occasionally work from home abroad, this income is generally still taxable in Austria.
However, if you spend more than 183 days in a certain period (depending on the specific DTA) in the country of activity, the right to tax this income may shift to that country.
Important note: Working from home abroad can not only lead to a change in taxation rights but also impact social security and labour law. Additionally, the employer may potentially establish a permanent establishment and become taxable abroad. The assessment of these situations is very complex and, in most cases, requires a case-by-case decision.
The People and Organisation Team at PwC is available to provide you with advice and support for cross-border working from home.
Other special cases
For pensions received from abroad, assembly work abroad, triangular arrangements and expatriates, special provisions exist in the respective DTAs. We are happy to advise you on the tax treatment of these matters if you have any questions.
2. Avoidance of double taxation
If two or more countries have taxation rights on your employment income, double taxation is prevented or limited by the applicable DTA. The country of residence can tax your worldwide income but must either credit the foreign income tax (“credit method”) or exempt the foreign employment income from taxation (“exemption method”) to avoid double taxation.
• Under the credit method, foreign employment income is taxed in the country of residence as if it were domestic income, and the foreign tax already paid is credited in Austria. If the tax rate abroad is lower, the difference must be paid in Austria.
• Under the exemption method, foreign employment income is exempt from taxation in Austria. Consequently, the tax burden lies abroad. Some DTAs also provide for a progression clause, which takes foreign income into account when determining the applicable average tax rate in Austria.
Do you have any questions? The People and Organisation Team is available to provide you with advice and support in similar cases.
