Changes concerning withholding tax for Software-as-a-Service and Infrastructure-as-a-Service

Under many Austrian double tax treaties, the remuneration for “industrial, commercial or scientific equipment” is treated as royalties subject to withholding tax (WHT). In a change from the previous interpretation, the Austrian Ministry of Finance has now stated that intangible assets (e.g. software) do not fall under the category of “equipment”. This has significant implications for the question as to whether royalty payments are deemed to exist in cases of Software-as-a-Service (SaaS) or Infrastructure-as-a-Service (IaaS), and whether such payments are subject to WHT.

Facts

In the Express Reply Service request on matters of international tax law EAS 3436, the Austrian Ministry of Finance had to rule on a case in which a company resident in Austria supplied SaaS and IaaS to a subordinate group company resident in China. At issue was whether the payments made constituted royalties within the meaning of Article 12 of the Austria-China Double Taxation Agreement (DTA), and whether the charging of WHT in China conformed with the DTA.

Reply granted by the Austrian Ministry of Finance

Article 12 para 3 Austria-China DTA envisages that payments for “the use of, or the right to use, industrial, commercial or scientific equipment” will be categorised as royalties. In its latest Express Reply Service ruling, the Austrian Ministry of Finance has now changed its previous view that intangibles may fall under the term “equipment”. This change is based on the UN Model Tax Convention, which since the revision of 2017 does not envisage intangibles being covered by the term “equipment”, and also states that items of equipment must be in “the possession or control” of the company.

Accordingly, in the case of a traditional grant-of-use of software via external drives, and in the case of SaaS, no use of “equipment” may be deemed to exist, and the fee will no longer be covered by the category of royalties.

Regarding IaaS supplies, the Austrian Ministry of Finance makes the following distinction:

• The infrastructure provided must normally fulfil the definition of “equipment”.
• In addition, a power of disposal over the item of equipment (e.g. the server) must be granted, which it is anticipated will frequently not be the case.
• Only if both criteria are fulfilled can the provisions of Article 12 be applied and WHT substantiated with regard to the fee paid.

In practice

The Austrian Ministry of Finance appears to maintain the same view not only for double tax treaties which are to be interpreted based on the UN Model, but also for tax treaties based on the OECD Model. Consequently, the Express Reply Service ruling should apply generally to double tax treaties, which contain the wording “the use of, or the right to use, industrial, commercial or scientific equipment” in the royalties definition.

As concerns the assessment of individual cases, the new information can be used as a consideration within preliminary high-level analysis. Nevertheless, detailed analysis of the agreements underlying the payments is required to assess whether the royalties definition is actually fulfilled (or not).  This is also due to the fact that the general definition of royalties could be fulfilled (regardless of the definition of “equipment”). For example, in the case of SaaS supplies, remuneration could be paid for “the use of, or the right to use, any copyright” that may be subject to withholding tax (in the other contracting state).

The revised view of the Austrian Ministry of Finance may lead to double taxation. If the other treaty state (source state) applies a different interpretation, and applies a corresponding WHT, the Austrian Ministry of Finance takes the view that it would not automatically be possible to credit this in Austria. Instead, it must be determined on a case-by-case basis whether a mutual agreement procedure is required.