New UK/Austria tax treaty is signed

Fri 09 Nov 2018

A new double tax agreement between the UK and Austria was signed on 23 October 2018. Subject to both countries having completed their parliamentary procedures and exchanged diplomatic notes, it will to come into force for the fiscal year beginning on or after 1 January following the entry into force for Austrian taxes, and the following dates after entry into force for the UK: 1 April for UK corporation tax and 6 April for UK income and capital gains taxes.

The new treaty appears to be anticipating the position post-Brexit when the EU Parent/Subsidiary and the Interest & Royalties Directives may cease to apply to UK resident companies, by providing for zero withholding on dividends where a 10% interest in the payee is held by the payor. It also additionally provides that gains in respect of companies (other than listed companies) ‘rich’ in immovable property of the other state may be taxed in the state in which the property is situated.  This is in line with the UK policy of retaining its taxing rights over such entities with significant interests in UK immovable property.

The UK and Austria have both adopted the OECD multilateral instrument (MLI), with both jurisdictions having deposited their ratification of the MLI with the OECD. However, the UK/Austria treaty is not a covered agreement in the UK’s adoption of the MLI, so it will not apply to the UK/Austria treaty (see here for the list of 121 jurisdictions to which the UK’s adoption of the MLI will apply).  As at September 2018 the OECD MLI covered over 1,400 bilateral treaties, with Saudi Arabia being the 84^th jurisdiction to adopt it.  The Austrian treaties to which it will apply the OECD MLI can be found here (they do not include the treaty with the UK).

From 1 January 2019 the UK is adopting an amended definition of a permanent establishment (PE) into UK law. It will deny exemption from PE status if a non-UK resident company has (either on its own or with related parties) a cohesive UK business that is fragmented in such a way as to take advantage of the exceptions from PE status, which would not apply if the business were carried on in an un-fragmented form.  This appears to be in line with a provision in the OECD MLI article 13(4), which Austria has specifically chosen not to apply in its adoption of the MLI.  Neither the current nor the new UK Austria treaty contains an anti-fragmentation provision for PE status.

For a further discussion of the implications of the new treaty, when the MLI applies to a treaty or other international tax matters, please get in touch with a member of the Mazars international tax team.