New VwGH case law on the PE definition in tax treaty law

A new decision of the Austrian Supreme Administrative Court (VwGH) (22.6.2022, Ro 2020/13/0004) was recently published regarding the definition of a “fixed place” under tax treaty law. For a fixed place to exist, a taxable person must have power of disposal over it.

For Austrian tax purposes, a decisive hallmark of the existence of a permanent establishment (PE) is that a non-resident company has power of disposal over a fixed place in Austria and carries on business there. Case law consistently states that the concept of a “fixed place” within the meaning of Article 14 OECD Model Tax Convention (“OECD Model”) is equivalent to the PE definition under Article 5 OECD Model and must be interpreted in a uniform way.

In Austria, hardly any case law addresses the scope of the term “permanent establishment”. Consequently, the statements by the VwGH are particularly welcome and are of particular relevance in two types of cases:

• A fixed place of business can also be created by activities at the premises of a customer or a group entity if the power of disposal over the premises of the customer or a group entity is obtained.
• In addition, employees who work from home can effectively grant their employers a factual power of disposal over a home office, which means that a company may also be able to create a PE in an employee’s private home.

Current case law of the VwGH

In the circumstances underlying the case, an interpreter resident in Hungary provided language services in Austria. For this purpose, she used a workspace and office infrastructure at the premises of the Austrian customer “free-of-charge” on an occasional basis. In its decision, the VwGH denied the existence of an Austrian PE of the interpreter. With regard to the power of disposal as an essential criterion of a permanent establishment, the VwGH noted that the possibility of shared use of a desk in an office of another taxable person is insufficient to substantiate a power of disposal over a fixed place of business.

At first sight, the VwGH’s statement seems to imply that no PE can be created in the premises of another taxable person per se. However, the mere “possibility” of shared use was similarly not a hallmark for a PE in previous administrative practice.

Consequences

• The extent to which the most recent VwGH case law actually reduces the risk of an Austrian PE being substantiated in the case of an cross border employee assignment within a company group, or in the case of a non-resident employees being granted use of a workspace at the premises of an Austrian group company or of an Austrian customer, will depend strongly on the circumstances of the individual case.
• In our view, there is still a risk that an Austrian home office PE can be created, as the VwGH has not addressed the issue of working from home (WFH). Consequently, potential tax effects of any WFH activities in another state must – as before – be looked at in detail.

The dynamics of international tax law and the interpretation of the PE definition in the Austrian Transfer Pricing Guidelines mean that cross-border business activities and WFH activities in Austria of employees of non-resident companies are not immune to the risk of creating a PE in Austria.