Measures taken in connection with the rapid spread of the corona virus have completely changed the daily operations of most companies. In addition to the introduction of short-time work, many companies have enabled their employees to work from their home office in order to minimize the risk of infection of their employees. Since the nearest national border in Austria is often not far away, enabling employees to work from their home offices in foreign countries can quickly lead unintended tax consequences for both employees and their employer. Below, we would like to point out selected aspects in connection with the corona measures.
Permanent Establishments in other countries
In the past, multinational corporations have experienced that, in reaction to certain events, employees are prone to change their residence. Additionally, the geographical circumstances of Austria enable employees to keep their residence in one of Austria’s neighboring countries, while still working in Austria during the week.
The activity of an employee in a country in which the employer previously had no branch office or permanent establishment often involves the risk for the employer that the employee's activity abroad will result in a permanent establishment (PE) for corporate tax purposes.
Under certain circumstances, an employee's private home office may be regarded as a 'fixed place of business’ which establishes a PE for the employer. This would lead to a limited taxation right of the foreign state with regard to the income that is attributable to the home office, which now qualifies as a permanent establishment. In this case, tax returns may have to be submitted abroad and corporate income tax may have to be paid.
Construction work may constitute a permanent establishment for income tax purposes if it exceeds a certain duration. The duration varies depending on the applicable double taxation treaty and is usually between 6 and 24 months. The period starts with the first activity on the construction site (with the exception of the delivery of goods) and normally ends when the plant is handed over to the customer. Generally, a halt to construction, such as that resulting from the current corona measures, does not interrupt the tax treaty terms. However, many countries have taken relief measures for taxable companies due to the current situation. We therefore recommend clarifying with the respective tax authorities whether a deadline suspension may be assumed due to the current situation.
Taxation of employees
Unlimited tax liability
In many countries, longer periods of physical stay will lead to unlimited tax liability. In Austria, for example, unlimited tax liability is established not only in the case of a domestic residence, but also in cases of a 'habitual residence' in Austria. In any case, a habitual residence is assumed in the case of a stay of more than six months, whereby, according to the Austrian view, involuntary stays, e.g. due to quarantine measures, illness or exit restrictions, are included as well. Unlimited tax liability constitutes the general claim of a country to tax the world income of a person. Double taxation agreements can of course allocate taxation rights differently.
Taxation rights in connection with postings
Double tax treaties regularly provide for an exclusion of a country’s right of taxation in the case of postings to countries outside an employee’s country of residence for more than 183 days within a certain period of time, if they have no employer in that state and if the employer does not have a permanent establishment in that country. Measures taken in connection with the Corona crisis may now lead to a change in the tax assessment regarding the 183-day period. In the event of premature termination of postings, any planned exceeding of the 183-day period may be omitted. Conversely, exit restrictions and quarantine measures could lead to an unscheduled tax liability arising from exceeding the 183-day period. In many cases, a reassessment of the tax situation will be necessary. In any case, we recommend keeping a calendar showing the days of residence and activity in the respective countries.
Austria has adopted in agreement with some of its neighboring countries (e.g. Germany) a ‘cross-border commuter regulation’, which exceptionally provide for a right of taxation of the country of residence, although the employees concerned work in the neighboring state. Whether a temporary stay in the country of residence (e.g. for home office work or due to temporary business interruptions) affects the applicability of the cross-border commuter regulations is currently unclear and remains to be clarified by the authorities.
If you have any questions on the topics mentioned above, our experts are happy to be at your disposal. To assist you in these unusual and challenging times, we would be happy to work together with our international colleagues to determine your company’s tax risks as well as possible tax reliefs.