Clarification by the Federal Ministry of Finance (BMF) regarding the obligation to deduct income tax for foreign companies

Currently, there is an obligation to pay income tax, if the employee’s work for the company leads to the formation of an income tax permanent establishment (kindly refer also to our article on “Homeoffice als Unternehmerrisiko” – unfortunately, only available in German). An amendment to the Income Tax Act within the framework of the Tax Amendment Act 2020 does now follow, which will have a particular impact on foreign employers without such an income tax permanent establishment.

The new wording in §47 Abs 1 EstG after AbgÄG 2020 is now decisive (see BGBl I Nr. 91/2019 – the below is just a rough translation. For exact wording, kindly refer to the original, German version):

(1) An employee is a natural person that receives income from (dependent) employment. An employer is someone who pays wages within the meaning of § 25. If there is a domestic permanent establishment (§ 81) of the employer, income tax is levied on income from employment (§ 25) by deducting it from the wages (wage tax). If there is no domestic permanent establishment (§ 81) of the employer, the following applies:

a) income from employment (§ 25) of employees with unlimited tax liability must be subject to income tax by deducting it from their wages (wage tax);

b) income from employment (§ 25) of employees with limited tax liability may be subject to income tax by deducting it from their wages (wage tax);

c) for remuneration and benefits from foreign institutions within the meaning of §5(4) of the Pension Fund Act (§25) income tax shall be levied by deducting it from wages (wage tax)

d) The Graz City Tax Office shall be responsible for levying the income tax in accordance with lit. a to c.

In summary, the obligation to pay income tax is no longer dependent on the existence of a domestic income tax permanent establishment, but rather on whether the employees in Austria are subject to unlimited taxation. If this is the case (e.g. due to a home office), the obligation to withhold income tax automatically arises.

If only a limited income tax liability exists for an employee without a domestic permanent establishment for income tax purposes, then the payment of income tax is not obligatory, but is possible on a voluntary basis.

In the future, foreign companies in Austria will increasingly have to register for wage tax and payroll accounting. For existing employment relationships it should therefore be examined whether the new regulation will apply at the beginning of 2020 and whether appropriate steps can be taken.

The change will come into force at the beginning of the wage payment periods ending after 31 December 2019. Due to the current development of the Finance Organization Reform Act (FORG), the reference to the Graz City Tax Office may be omitted in the future, meaning that other Tax office might be responsible.

Do you have questions about this or similar topics? We are happy to be there for you! 

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