In EAS 3421 of 25.3.2020, the Federal Ministry of Finance has addressed the question of whether shares from a Hungarian agricultural corporation is to be attributed to a permanent establishment in Hungary or not. By answering this question, central points concerning a permanent establishment by an agricultural activity and the attribution of shares to a permanent establishment were discussed.
The case
Through a corporation (Kft) registered in Hungary, a person, who is taxable in Austria, carries out agricultural activities in Hungary. He is the majority shareholder-managing director of the operating corporation and holds its share in his private assets. In addition, the taxpayer also owns an agricultural business registered in Hungary in the form of a sole proprietorship. The business is to be regarded as an Austrian enterprise on the basis of the Austrian entrepreneur's place of residence (Art. 3, para. 1, letter b DBA-Hungary). There are no employees in the enterprise. The only purpose is to acquire land. This land is farmed by employees of the Kft, who use the machinery of the Kft for this. The question now is whether, in the case of a distribution of profits by the Kft (Article 10, para. 4 DBA-Hungary) or in the case of a sale of the shares from the Kft (Article 13, para. 2 DBA-Hungary), the income is to be attributed to a permanent establishment of the sole proprietorship in Hungary. If the answer is yes, Hungary would have the right of taxation because of the permanent establishment.
View of the tax authorities
It must be noted that, according to the OECD, an agricultural enterprise can generally be a permanent establishment. However, the general requirements of a permanent establishment as defined in Art 5 OECD-MA must be fulfilled. One of these conditions is the existence of an entrepreneurial activity, which is not the case for a pure asset management. So if the only purpose of the sole proprietorship is to acquire real estate and making it available to the Kft, no permanent establishment in Hungary will be established. Furthermore, it must be examined whether the shares, who are held as private assets, can be contributed to the business assets of the sole proprietorship. According to Austrian national law, this is only possible, if the shares are considered as necessary business assets (EStR 2000 Rz 492).
In addition, the attribution of the participation to the permanent establishment in Hungary would require a functional connection with the permanent establishment (principles of the AOA). Even if necessary business assets exist, there may be no functional connection between the investment and the permanent establishment. The economic point of view is relevant, which means that the right to the dividend and the potential risk has to be at the permanent establishment in Hungary. If the shares were to be allocated to the Hungarian permanent establishment, the loss of Austrias taxation right would result in an exit taxation (§ 6 no. 6 lit a EStG).
Conclusion
The EAS presents a number of central points regarding the permanent establishment by an agricultural activity abroad and the attribution of shares to a permanent establishment. Pure asset management is not enough for establishing a permanent establishment. Furthermore it is necessary for the attribution of the shares to a permanent establishment that they are business assets under national law. In addition there has to be a functional link between the shares and the permanent establishment. The question of attribution in the individual case needs to be solved by the tax office.
