New approach to withholding tax relief for personnel leasing
For the Austrian Ministry of Finance (BMF), the ruling of the Austrian Supreme Administrative Court (VwGH) of 23 April 2021 (Ra 2020/13/0089) provided the impetus to conduct a pragmatic overhaul of withholding tax relief in the form of the Ordinance on Withholding Tax Relief for Personnel Leasing.
Initial situation
As foreign employers are subject to limited tax liability when leasing personnel to carry out work in Austria, the hiring company is required to withhold 20% of the leasing fee in such cases. Even if the applicable Austrian double tax treaty removes the right to tax the corporate profits of the leasing employer because it does not have a permanent establishment in Austria, relief from withholding tax is not automatically entailed. The withholding tax serves to ensure taxation of the leased personnel. If the Austrian income of the leased personnel is not already subject to tax (via wage tax deduction or assessment), the VwGH takes the view that fictive income tax must be calculated for the leased personnel. The withholding tax can only be refunded to the extent that it exceeds the fictive income tax amount. The necessary comparison calculation would create a significant administrative burden for the leasing employer and the tax authorities. By issuing the DTT Implementation Adjustment Ordinance, the BMF has tried to achieve an administrative simplification using a fixed rate approach.
Key points of the new ordinance – fixed rates
The new ordinance applies fixed rates to divide withholding tax into a 70% employee portion and a 30% company portion. The income from employment of the leased personnel shall be deemed to be covered by the 70% fixed rate withholding tax on the leasing fee. Relief on the 30% company portion is possible if – in the absence of a permanent establishment of the foreign legal employer – Austria does not have a right to tax corporate profits arising from personnel leasing under tax treaty law. No possibility of evidencing a different percentage ratio during the procedure is envisaged.
Tax relief may be provided either by relief at source or by refund:
1. Relief at source
a) Full relief at source by carrying out voluntary wage tax deduction
The new rules will be applied to leasing fees paid after 1 September 2022. Full relief at source is only possible for intra-group employee assignments. The prerequisite is that voluntary wage tax deduction is carried out and a tax residency certificate is provided for the foreign leasing employer.
In all other cases, an exemption notice must be requested as before. For request purposes, it is necessary to carry out voluntary wage tax deduction. In the case of short-term personnel leasing from Germany, it is necessary to provide evidence that no tax liability exists in Austria in accordance with Art 15 para 3 Austria-Germany Double Taxation Agreement.
b) Simplified relief at source at 30% without voluntary wage tax deduction
For leasing fees paid after 1 September 2022 in the context of intra-group employee assignments, 30% of the leasing fee can be subject to relief at source if the foreign leasing employer can provide a tax residency certificate. This has the effect of reducing withholding tax to 14% (70% of the leasing fee x 20% withholding tax).
For all other cases, it is planned that from 1 January 2023, it will also be possible to obtain relief for 30% of the leasing fee. However, an exemption notice must be requested for this partial relief at source. The tax authority is currently preparing technical details of implementation. It is not currently known how much documentation will need to be submitted during the request procedure to evidence that no avoidance arrangement exists.
2. Refund – to apply to all open cases
In general, a refund is possible within 5 years of the date of withholding.
a) Full relief
A full refund can only be carried out if a voluntary wage tax deduction is carried out for leased personnel. In the case of short-term personnel leasing from Germany, it is sufficient to provide evidence that no tax liability exists in Austria in accordance with Art. 15 para. 3 Austria-Germany Double Taxation Agreement.
According to the Ordinance, a full refund of withholding tax on the basis of a completed assessment (without voluntary wage tax deduction) is not possible. This should be viewed critically insofar as the VwGH has explicitly indicated this as a potential option. In accordance with Sec. 98 para. 1 no. 4 Austrian Income Tax Act (EStG), the taxation of income from employment of personnel subject to limited tax liability is not to be carried out if they have already been covered indirectly by withholding tax. As the Ordinance has completely blocked the option of relief for 70% of the leasing fee without voluntary wage tax deduction being carried out, indirect taxation via withholding tax remains the primary mode of taxation. The BMF understands that it would consequently be impossible to assess this income.
b) Relief at 30%
In the refund procedure, 30% of the withholding tax on the leasing fee can be refunded, even if no voluntary wage tax deduction was carried out. Currently, online forms are not yet available for this partial refund.
Conclusion and open questions
Even if no comprehensive reform of withholding tax has been undertaken, the fixed rate division of the leasing fee into employee and company portions represents a significant administrative simplification.
For coordination with foreign tax administrations, it may prove advantageous that the Ordinance now explicitly states that 70% of the withholding tax is designated to cover the leased personnel for tax purposes. The extent to which evidence of the withholding tax relating to an employee will be accepted as a tax certificate when carrying out an assessment of income from employment in a foreign jurisdiction will only become clear in practice.
How practicable the partial relief at source on 30% of the assessment fee will be in the context of commercial personnel leasing or intra-Group employee assignments will depend significantly on the required scope and detail of documentation for request purposes. The ministerial decree and the forms will not be made available until early next year.
If voluntary wage tax deduction is carried out to provide relief from withholding tax, the Ordinance requires that the foreign legal employer accepts wage tax liability in accordance with Sec. 82 EStG. Austrian law states that wage tax liability of this kind is explicitly not envisaged in the context of voluntary wage tax deduction. Case law will be required to clarify the extent to which the leasing employer can be made liable, as well as which conditions would apply.
Tax professionals wanted to make it possible for hiring companies to carry out wage tax deduction themselves. The DTT Implementation Adjustment Ordinance refers to wage tax deduction within the meaning of Sec. 47 para. 1 no. 1 EStG, i.e. to voluntary wage tax deduction by the employer. It remains to be seen whether the ministerial decree will explicitly cover cases in which the hiring company takes over employer obligations.
As the function of the withholding tax to safeguard tax revenues only applies to taxpayers subject to limited tax liability, it must be possible to grant a full tax refund for employees subject to unlimited tax liability even if no voluntary wage tax deduction was carried out. However, the Ordinance does not set out any simplified procedure for cases like these. Separate coordination with the tax authority will continue to be required.
