Tax Residency: Basics, International Regulations, and Recent Case Law

Definition and Importance of Tax Residency

Tax residency is a key concept in tax law that determines the allocation of a natural or legal person to a specific country for tax purposes. At the national level, the first step is to assess personal tax liability. According to Section 1(2) of the Austrian Income Tax Act (EStG 1988), a person is subject to unlimited tax liability if they have a domicile or habitual abode in Austria. This means their worldwide income is subject to taxation in Austria, including both domestic and foreign income.

Residency is not only relevant in domestic tax law but is especially important in cross-border situations. It determines which country has the right to tax certain types of income and forms the basis for avoiding double taxation. If a person earns income in other countries, that income is typically subject to limited tax liability in those countries and is taxed there as well. To prevent double taxation, double taxation agreements (DTAs) are applied. These agreements define which country has the right to tax and how relief is granted – either through exemption or credit methods. 

Residency in the International Context: OECD Criteria 

In international tax law, the issue of residency is crucial – especially when a person is considered a resident in more than one country under national law. In such cases, multiple countries may claim the right to tax the person’s worldwide income, leading to conflicts and potential double taxation.

To resolve such conflicts, countries enter into double taxation agreements (DTAs). Most of these agreements are based on the OECD Model Tax Convention (OECD-MTC), which serves as the international standard for allocating taxing rights and defining tax residency. 

A key provision is Article 4 of the OECD-MTC, which defines a “resident of a contracting state.” A person is considered a resident if they are liable to tax in that state by reason of domicile, residence, place of management, or other similar criteria.

If a natural person is considered a resident under the law of both contracting states, the question arises as to which state has the taxing right. In such cases, the so-called “tie-breaker rule” in Article 4(2) of the OECD-MTC applies, which provides a step-by-step assessment of various criteria. 
 
Tie-Breaker Rule 
The first step is to determine whether the person has a permanent home in one of the two states. If a permanent home exists in both states, the next step is to assess the centre of vital interests – the state with which the person has closer personal and economic ties. Personal ties are generally given greater weight.

This step often leads to uncertainty in practice and represents a frequent obstacle, as determining the centre of vital interests depends heavily on the individual case. A comprehensive assessment of all relevant circumstances is required, including family ties, professional activities, assets, and social connections. The distinction is often complex and requires careful analysis.

If this criterion does not lead to a clear result, the habitual abode and, if necessary, nationality are considered. If residency still cannot be determined, Article 25 of the OECD-MTC provides a mutual agreement procedure, in which the competent authorities of both states work together to find a solution and avoid double taxation.

Methods for Avoiding Double Taxation 

To prevent individuals and companies from being taxed in multiple countries on the same income, various mechanisms are used in practice. These include the exemption method and the credit method.

Under the exemption method, foreign income is exempt from taxation in the country of residence. However, in many cases, the progression clause applies, meaning that foreign income affects the tax rate applied to domestic income.

In contrast, the credit method allows foreign taxes paid to be credited against the tax liability in the country of residence. However, the credit is limited to the amount of tax that would be due on that income domestically.

In Austria, the exemption method is provided for in most DTAs. The progression clause  ensures that foreign income is considered when determining the applicable tax rate.

Case Law

In its decision of 10 February 2025 (RV/7104138/2023), the Austrian Federal Fiscal Court addressed the residency of a taxpayer who received director’s remuneration of EUR 30,000 from Slovakia while maintaining a primary residence and employment in Austria, where his wife also lived.

The court held that the centre of vital interests was in Austria due to stronger personal ties. Despite tax registration in Slovakia, residency in Austria could not be refuted. Although the income from Slovakia is taxable there under the Austria–Slovakia DTA and is exempt from Austrian taxation under the exemption method, it is included in the Austrian tax calculation under the progression clause.

Other decisions by the Federal Fiscal Court also highlight the importance of personal ties in determining residency. For example, in a decision dated 24 May 2024 (RV/7100717/2024), a taxpayer had residences in both Austria and Switzerland. The court emphasized that the quality of personal ties – especially family relationships outweighs economic connections. In another case dated 21 September 2023 (RV/4100757/2019), the court found that a temporary assignment in Germany was insufficient to shift the center of vital interests away from Austria, as long as family ties remained unchanged there. 

Conclusion

Anyone who is active in multiple countries or maintains residences in more than one country should seek a well-founded tax analysis at an early stage. Our expertise in understanding the relevant legal provisions and applying them in practice enables us to accurately determine tax residency and optimise the resulting tax implications. We are happy to support you with expert advice to provide clarity and help you avoid potential risks.