Austria: Progression proviso in the source state
Published on April 28, 2021
In a recent decision of the Administrative Court, the court dealt with the question of whether income subject to progression proviso is to be taken into account for determining the applicable tax rate in the source state under Treaty Law. According to previous administrative practice, this right was only reserved for the state of residence according to the relevant Double Tax Treaty (DTT).
Facts of the case:
A Slovakian citizen was temporarily posted to Austria within the company group. She spent the majority of her working days in Austria, but individual working days were also spent in Slovakia. She had a domicile in Austria at her disposal, but the country of residence under Treaty Law remained Slovakia. In principle, a person is a resident of the state in which he or she has his or her only domicile or, in the case of domiciles in two states, of the state with which he or she has closer personal and economic relations. Since in this special case a willingness to return was to be assumed due to the temporary activity, and in the case of dual residency the closer personal relations are always the decisive factor, Slovakia continued to be the country of residence under Treaty Law. The remuneration was taxed both in Austria and in Slovakia on a pro rata basis according to the number of working days spent in the respective countries.
Decision of the Court:
In this decision, for the first time, the source state Austria was granted the right to take into account income taxable abroad within the framework of the progression proviso (and therefore not only the state of residence). On the other hand, the fact that Slovakia is residence state under Treaty Law was not challenged. The consideration of the progression proviso in the source state represented a departure from the previous administrative practice, especially since the Austrian Income Tax Guidelines (which are actually not legally binding) stipulate that for this to apply, that it must either be provided for in the method article or there must be unlimited tax liability and Austria must be residence state under Treaty Law.
The court justified this by stating that the progression proviso could already be derived from domestic law in the case of unlimited tax liability. Furthermore, it was explained that the application of the progression proviso according to the DTT Slovakia is incumbent on the state of residence, however, the DTT does not contain any regulations that would prohibit the source state from applying it analogously. The OECD Model Commentary does not contain any contrary opinion either, as it does not deal with the progression proviso in relation to the source state. Failure to mention it could therefore not preclude its application.
It remains to be seen how this decision will affect future tax assessments in Austria. In any case, it is recommended to disclose any income that is taxable outside Austria in the course of tax return submission in Austria in order to avoid consequences under criminal tax law.
If, for assessments that have already been issued, subsequent tax assessment notices are issued in which foreign income is subsequently taken into account, resulting in additional tax liabilities, it would be possible to have this judged by the next instance. The Higher Administrative Court has not yet had to deal with this.