Article 17 – Racing Days, Training Days, and the Weighting of Each Race

Last month, I participated in the Tax Treaty Case Law around the Globe 2020 conference organized by the European Tax College of the Fiscal Institute Tilburg, in joint venture with the Institute for Austrian and International Tax Law. Due to the Corona crisis, it was held online for the first time, and it was a great success.

I presented on a case of the Austrian Supreme Administrative Court about the allocation of income under Article 17 of the OECD Model Tax Convention. It provides that “income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.”

Facts of the Case

The taxpayer, a resident of Austria, worked as a professional racing cyclist for a German cycling team in an employment relationship. As remuneration, he received monthly a conto payments, a final payment at the end of the year, and prize money. Under Article 17, the remuneration in respect of the personal activities as such was allocated to the different states of performance.

In the decision Ra 2017/15/0043 of 27 June 2018, the Austrian Supreme Administrative Court dealt with several questions related to the computation of the income under Austrian domestic tax law. As the Supreme Administrative Court overturned the Federal Fiscal Court’s first decision for several reasons, the Federal Fiscal Court rendered a second decision in which it allocated the income on the basis of the racing days. Moreover, the Federal Fiscal Court weighted the racing days based on the points for the winner as determined by the world governing body of cycling, Union Cycliste Internationale (UCI). The tax authority appealed this second decision and argued that the allocation must be based on the racing days alone without consideration of the points for the winner of each race. This led to a new decision of the Supreme Administrative Court.

The Court Decision

In the decision Ra 2019/15/0038 of 30 April 2019, the Austrian Supreme Administrative Court held with regard to the tax authority’s appeal that the relevant provision for the allocation of income is Article 17 (entertainers and sportspersons) and not Article 15 (income from employment) of the relevant tax treaty. Thus, the literature on Article 15 relied on by the tax authority according to which the allocation of income should be based on the agreed working days per year and the actual working days spent abroad is not material in the present case. If the Federal Fiscal Court, in its second decision, allocated the income to the different states of performance as part of an estimation by weighting the racing days based on the points for the winner as determined by the world governing body of cycling, Union Cycliste Internationale (UCI), this does not constitute an incorrect assessment in this case-by-case decision.

Upcoming Book

At the beginning of 2021, the IBFD will publish a conference book summarizing all presented cases. Therein, you will also find my comments about the Austrian case and the allocation of income based on racing and/or training days under Article 17.

Taxation of Directors’ Fees under Tax Treaty Law

In 2019, I presented at the “Wiener Bilanzrechtstage 2019” in Vienna about the taxation of directors’ fees under tax treaty law. Now the conference book “Organe von Unternehmen in Recht und Rechnungswesen” including my contribution “Geschäftsführer im Internationalen Steuerrecht” has been published.

Who is the economic employer under a tax treaty when a director works for serveral group companies?

From an Austrian and German perspective, only directors’ fees received by members of a supervisory board (non-executive directors) are covered by the special rule for directors’ fees of Article 16 of the OECD Model. Thus, directors’ fees received by managers (executive directors) normally constitute income from employment and fall under Article 15 of the OECD Model.

This means that the taxation of the remuneration depends on the place of work principle and the meaning of the undefined treaty term “employer”, which is now interpreted in an economic manner. In MNEs, managers are often employed by one company (e.g. the group parent) and also work as executive director for another group company. Under the transfer pricing rules, at least some part of the manager’s remuneration has to be charged to the other group company. While this group company economically bear the remuneration, it is unclear whether it is the economic employer and bears the remuneration of the manager as such (contract of service) or whether it is only a recipient of a group service and bears the remuneration only as part of an arm’s length service fee (contract for services).

I argue that group charges alone should not lead to the conclusion that the company that economically bears the cost of the remuneration is the employer of the manager for tax treaty purposes. Instead, various employer functions need to be considered. It has to be determined which company mainly exercises the relevant employer functions. For instance, if the parent company exercises substancial influence over the daily business of another group company to which the manager has been assigned, this is an indication that the parent company remained the economic employer of the manager and is therefore able to provide a group service.

Special domestic allocation rule addressing interposted management corporations

In my contribution, I also address the special anti-avoidance rule in § 2 para. 4a of the Austrian Income Tax Act. In certain circumstances, this rule disregards a management corporation owned by a manager that provides manager’s services to another (unrelated) company. Thus, the remuneration is allocated directly to the executive director. If the interposted company later pays a dividend, this further has no tax consequences in Austria since the remuneration has already been taxed at the level of the individual.

In order to avoid international juridical double taxation when the remuneration is taxed both abroad (corporate income tax: CIT) and in Austria (individual income tax: IIT), the Austrian tax administration is prepared to apply the principles of the Partnership Report and to grant an exemption or credit in Austria. If the remuneration paid to the interposed management corporation is subject to CIT abroad (because the other country does not have a similar look-through rule), the Austrian tax administration is able to grant an exemption for the IIT otherwise payable in Austria.

This interaction of the special anti-avoidance rule in § 2 para. 4a of the Austrian Income Tax Act and the principles of the Partnership Report might theoretically also result in a tax saving. Instead of paying up to 55% Austrian IIT (or first 25% Austrian CIT and later 27,5% Austrian withholding tax on dividends if the look-through rule was not applicable), the manager’s remuneration could be subject to foreign CIT only. According to the Austrian tax administration, there would also be no Austrian tax on dividend distributions. Most probably, however, the tax administration would abstain from applying the principles of the Partnership Report in such cases.

Overall, the special anti-avoidance rule is a good example for a rule that was designed having domestic cases in mind. Thus, cross-border cases might become quite complex and lead to unintended situations of double taxation, and to new loopholes.