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Directors’ fees in the application of Austrian DTTs – Has a turning point been reached?

08/11/21

In a globalised world, cross-border transactions have become the norm. Even though travel has been restricted globally due to the Covid-19 pandemic, HR and tax departments are confronted with international issues more frequently than ever. At present, many employees want to work remotely, even though their employer is located in another state. If the employer approves this, it can – in the worst case – lead to double taxation. Double taxation can occur, in particular, if the double tax treaty (“DTT”) concluded between Austria and the relevant contracting state is interpreted differently by the two states. In practice, differences in interpretation of this kind occur frequently in relation to the fees of managing directors under tax treaty law.

1.    Different interpretation of Art 16

In practice, many countries tax the remuneration of managing directors and board members at 100% in the state of residence or residence of the company by attributing this remuneration to Article 16 OECD-MC. According to this view, the fees are covered by the provision relating to what are termed “directors’ fees” in the English version. From the Austrian tax perspective, however, Article 16 may only be applied, if the activities relate purely to supervisory activities. This is substantiated on the basis of the German wording of the provision, which is translated as “Aufsichts- und Verwaltungsratsvergütungen” (i.e “supervisory and administrative board remuneration”). According to the previous administrative practice of the Austrian Ministry of Finance, this only covered supervisory activities; operational activities, such as those of managing directors or executive board members, were to be assessed in accordance with Article 15 OECD-MC (“income from employment”).

In accordance with the Austrian view and applying Article 15 OECD-MC, if activities as a managing director are carried out in both the state of the director’s taxresidence and the company’s state of residence, the taxation right should be apportioned between the two states. However, if the other state applies Article 16 OECD-MC and desires a 100% taxation right, this creates double taxation.

2.    Latest case law in Austria

The Austrian Supreme Administrative Court (VwGH) has rejected the first tax court’s decision on a case, in which individuals carried out management functions within an Austrian GmbH (limited company) but did so almost exclusively from Russia. The question was whether the managing directors were subject to wage tax in Austria, which the VwGH ultimately rejected. The first tax court has to reassess the case.

However, what is notable in this context is that the VwGH “commissioned” the first court (without this being the main subject matter of the dispute) to appraise the German, Russian and English-language versions of Article 16 DTT Austria-Russia in parallel. Should the result of this be that the remuneration of managing directors is covered by Article 16 DTT, the taxation right for the remuneration of managing directors would be based solely on the tax residence of the GmbH.

3.    Recommendation

Should you be affected by similar circumstances, we would be glad to provide assistance in making your case to the tax authorities in order to avoid existing or impending double taxation.

Author: Evelyn Kappel

We encourage feedback on the newsletter and the content. Equally, we welcome any of your thoughts on topics that you would like to see addressed in future issues.

Copyright and Publisher: PwC Österreich GmbH Wirtschaftsprüfungsgesellschaft, Donau-City-Straße 7, 1220 Vienna, Austria

Editor: Eva Ebner, eva.ebner@pwc.com

The above information is intended to provide general guidance only. It should not be used as a substitute for professional advice or as the basis for decisions or actions without prior consultation with your advisors. While every care has been taken in the preparation of the publication, no liability is accepted for any statement, option, error or omission.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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