In 2018 the Austrian Ministry of Finance published two important opinions about permanent establishments in Austria. Both of the opinions were answers to questions raised through the Express Answer Service of the Austrian Ministry of Finance, a service which enables taxpayers to post questions of interpretation regarding international tax matters. One of the questions about permanent establishment in Austria dealt with the influence of trial runs and another with the issue of subcontracting total projects.
Consideration of trial runs and the 12-month term
In EAS 3407 a German company was commissioned to provide construction and assembly works in Austria. The operational plant was provisionally accepted by the customer, with final acceptance some months later after trial runs and minor improvements were finished. Hence, the question was whether the provisional or the final acceptance of the plant was relevant for the end of the 12-month term of Article 5(3) in the double taxation agreement between Austria and Germany.
Based on paragraph 55 of the commentary to Article 5 OECD Model Tax Convention (concerning the definition of permanent establishment) , trial runs are generally included in the 12-month period during which the construction site exists. However, based on the principle of the OECD commentary that a construction site ceases to exist when the work is completed or permanently abandoned, the Austrian Ministry of Finance is of the opinion that a trial run can be included in this 12-month period only if:
- the unfinished plant is left in an orderly condition, or
- defects have been rectified so as to guarantee the full operability of the plant, or
- the trial run is essential for the operability of the plant.
A trial run performed after the on-site work is finished is therefore not relevant for calculating the 12-month term. This also applies for the removal of minor defects, repair work during the warranty period, and other services provided after on-site work has been completed. The formal act of a final acceptance can be an indicator for the end of the permanent establisment term, but it will only be relevant if it corresponds with the actual end of the works on-site.
Subcontracting of entire projects
In EAS 3405, an Italian company (ITco) subcontracted the execution of an Austrian project to its Italian subsidiary (SUBco). The project lasted well beyond 12 months. The question raised through the Express Answer Service of the Austrian Ministry of Finance was whether a permanent establisment would be triggered for ITco, even though it had subcontracted the project.
According to the Austrian Ministry of Finance, the existence of a permanent establisment of ITco depends on whether ITco is able to dispose of the Austrian construction site. This would, for example, be the case if ITco has legal possession of the site, controls access to and use of the construction site, and has overall responsibility for what happens at the site (see also paragraph 54 of the commentary on Article 5 OECD Model Tax Convention). In such cases employees of ITco would typically be present to perform supervisory activities. We would generally assume that the general contractor (ITco) is in charge of the total project, and hence liable to the customer for the correct delivery of the order placed.
If in fact the total project is delegated to SUBco, and hence ITco cannot dispose of the construction site, the existence of a permanent establisment of ITco would be questionable. However, we would have to question the economic purpose of introducing ITco as a general contractor, if no functions remain with ITco.
If you would like to know more about permanent establishments in Austria or about other opinions of the Austrian Ministry of Finance regarding international tax matters, please visit the homepage of ICON Wirtschaftstreuhand GmbH, partner firm of WTS Global in Austria!