New letter ruling on permanent establishments in the case of auxiliary activities within a company group

On 1 June 2021, the Austrian Ministry of Finance (MoF) published EAS (Express Answer Service) 3432. In this letter ruling, the MoF confirmed its previous view that there is only one set of circumstances in which activities, which by their nature constitute preparatory or auxiliary activities, do not lead to the creation of a permanent establishment (PE), namely if preparatory or auxiliary activities are carried out internally for the company only.

Auxiliary activities when working from home

The private home (in Austria) of an employee can constitute a PE in Austria of a foreign employer under both Austrian law and treaty law. However, if the employee only carries out preparatory or auxiliary activities in his/her home, this does not lead to the creation of a PE for the employer, provided that these activities are only carried out internally for the company. It is only possible to assess whether homeworking activities constitute preparatory/auxiliary activities or whether they belong to the core activities of the company in relation to specific circumstances on a case-by-case basis.

If activities which, on their merits, constitute preparatory or auxiliary activities are carried out for other companies (whether within a company group or for unrelated third parties), the MoF takes the view that the PE exemption for auxiliary activities does not apply.

Implications in practice

Even though COVID-lated restrictions are being eased, more people are working from home. It is important to note that even a single employee working from home (in Austria), who regularly carries out merely subsidiary or even administrative activities for other (group) companies, is able to create a PE in Austria for his/her foreign employer. Even for these activities (e.g. accounting, human resources, IT support etc.), it should be questioned for whom these services are provided and whether they can be on-charged as (intra-group) support services (e.g. as part of intra-group allocations). If the PE exemption for auxiliary services does not apply, it will then be necessary to calculate the profit allocation in the appropriate amount.

Additionally, the risk of double taxation should be considered, particularly in relation to Germany, as the German tax authorities take a different view regarding the prerequisites for a home office PE (especially regarding the power of disposal of the employer over the home office).