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Update on the taxation of foreign employers without a permanent establishment

The Austrian Federal Ministry of Finance has updated the income tax guidelines regarding the taxation of foreign employers without a permanent establishment, which changes last year’s amendment and aligns it to the legal situation before January 2020.  A permanent establishment for payroll purposes is defined as any fixed local facility or establishment maintained by the employer in the country for a period of more than one month, if it serves to carry out the activity performed by the employee.

The new guidance states that backdated from 1 January 2020 onwards, foreign employers without a permanent establishment in Austria can voluntarily operate income tax withholding for employees that have unlimited or limited tax liability in Austria, depending on their tax residency.  In this new amendment, having a permanent establishment is a requirement, a change from previous law which stated that it was obligatory to operate tax withholding for every employee with an unlimited tax liability in Austria.

Importantly there is no obligation to operate Austrian tax withholding for employees who live in Austria and commute to work for a foreign employer in a neighboring country. Withholding could be operated on a voluntary basis. This applies for employees commuting between countries that have a commuting clause in their Double Taxation Treaty. Austria has these agreements with Germany, Italy and Liechtenstein.

If an employer chooses to operate Austrian tax withholding, they will be required to comply with the general rules. These include the obligations to keep a payroll account, to withhold and pay taxes, as well as to provide pay slips to employees. In the event the employer does not pay income tax correctly, the employee will be held directly liable for the tax payments.

Where a foreign employer chooses not to carry out voluntary income tax withholding for an employee with unlimited tax liability, they are still obliged to file an annual pay statement (Form L 17) with the Austrian tax authority.

Aspects of these changes should be welcomed, with voluntary rather than mandatory withholding allowing greater flexibility and less administration burden for global employers.  For those employers who choose to operate withholding, this will support employees in managing taxes and compliance through the year.

This article was written by Cornelia Rieger. If you would like to discuss any of the topics raised, please contact our experts Julia Saric-Bischof or Christoph Schmidl.