Tax preparation is a necessary evil when you plan to work abroad, whether it is in the course of an employment relationship or self-employed. So as not to miss or overlook anything tax-wise before the big step, good preparation is key. Which might seem as a lot of administrative burden at first pays off in the long run, ensuring legal security and avoiding (severe) additional payments. As tax cases with cross-border aspects are regularly quite complex too, it is highly recommended to consult a tax professional upfront who will support you with all tax-related matters that arise.
The following points summarize at a glance the main tax issues that may be thrown at you when going abroad for work.
1. Place of residence vs place of taxation. General rules for employees and entrepreneurs.
Usually, your resident country can tax your worldwide income, including wages, business income, benefits, income from property, or from any other source, whereas the definition of “resident state” is generally based on domicile or habitual abode. Each country has its own definition of “tax residence”, yet you will normally be considered tax-resident in the country where you spend more than 6 months a year. It is possible that two countries may consider you a tax resident at the same time. In that case, so-called double tax treaties (DTT) – which Austria concluded with numerous countries worldwide – provide rules to determine the right of taxation between the two states in order to prevent double taxation. Most double taxation agreements stipulate that one is tax resident in the country with which the closer personal (family) or economic ties exist, with the personal aspect being the decisive factor.
2. Working abroad in the course of an employment
When you are posted abroad to work in another country for not just a limited time (ie more than 183 days p.a.), your employee income is generally taxed in the country of activity. If the 183-day period is not exceeded within a 12-month period or calendar year (depending on the applicable double tax treaty), and the remuneration is paid by an employer who has neither a branch or permanent establishment (P/E) in the country of activity, the resident country may tax the employment income. Net wage and hypotax agreements can be used to prevent any tax-related disadvantages that may arise from working abroad.
If you are posted abroad and stay there for even more than 183 days, you may be still considered tax-resident in your home country according to the DTT. This is the case if, in addition to a residence, there are stronger personal ties in your home country. In this case, the income from employment is subject to taxation in the country of activity to the extent that it is attributable to working days spent there; income attributable to working days spent in your country of residence or in third countries is subject to taxation in the resident state. Depending on the DTT, the country of residence, which generally has the right to tax the entire world income, excludes the income taxable abroad from taxation or credits the taxes already paid on it.
3. Working abroad as an entrepreneur or managing directors with substantial participation
Income earned by a resident of a contracting state from self-employment is subject to taxation only in that state, unless a P/E is regularly available in the other contracting state (= state of activity) for the exercise of that activity. In this case, income may be taxed in the other state to the extent that it is attributable to the P/E. Concerning the P/E abroad, above all the period (> 6 mth), power of disposal as well as its use for business activities are crucial.
Significantly involved managing directors who, under domestic law, have income from self-employment according to Sec 22 lit 2 ITA are regularly more comparable to a self-employed person or an entrepreneur in DTT law. However, jurisprudence may considerably vary throughout the EU in this regard. If the applicable DTT does not permit any conclusions as to what income from managing directors with substantial participation is to be subsumed under, the Austrian Administrative Court (VwGH) states that the interpretation of the law must be based on national law. Apart from some DTTs – e.g. with Germany, which includes a special clause in Art. 16 (2) for income received by persons in the course of their activities as managing directors – the classification regularly takes place under Art 7 (business profits) or Art 14 (self-employed work). If the managing director is not a resident of the same country as the company, the income is solely taxable in the resident state of the company if the managing director maintains a P/E or fixed base on the premises of the company.
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PS: Please note, that we are no native speakers and that our blogposts were translated with the help of google translate.