Austria: Change in the VAT treatment of rental revenues of foreign property owners

The ECJ has revised the previously held view of the Austrian tax authorities, that a rented property always represents a domestic fixed establishment of the foreign owner with the consequence that the foreign owner must register for VAT in Austria and invoice with Austrian VAT. According to a ruling dated 3.6. 2021, C-931/19, Titanium Ltd, the court clarified that a property located in Austria without fulfilling the criteria of Art. 11 (EU) No. 282/2011 in terms of a suitable human structure does not constitute a fixed establishment.

Background

Titanium, whose registered office and management are located in Jersey, rented out Austrian property to Austrian taxpayers and appointed an Austrian real estate management company to manage the property’s affairs. Nevertheless, Titanium retained the decision-making power. Titanium always considered that it had the status of a non-established entity without a permanent establishment for VAT purposes in Austria because it didn’t have staff to act on behalf of the company in Austria. The tax office in Austria was of another opinion, based on a specific Austrian VAT guideline. Since Titanium disagreed with the Austrian tax authorities’ position, the case was referred to the ECJ.

The ECJ decided that Titanium did not have a fixed establishment for VAT purposes in Austria. The concept of a fixed establishment is stated in Art. 11 (EU) No. 282/2011 which lays down implementing measures for Directive 2006/112/EC. Therefore, a sufficient degree of permanence and, moreover, a suitable structure in terms of human and technical resources to enable the company to receive and use the services supplied for its own needs is required. These criteria were not fulfilled in the current case, because Titanium did not have its own staff in Austria who could act in the name and on behalf of Titanium.

Conclusion

The judgment in question has far-reaching effects on foreign investors who rent out property in Austria. As a consequence of this decision, non-resident taxpayers who rent out Austrian property to entrepreneurs (e.g. to an operating company with a hotel licence) without having their own staff in Austria have to apply the Reverse Charge Mechanism according to § 19 (1) Austrian VAT Act starting from 1 January 2022. The tax shall be payable by the entrepreneur to whom the services are supplied. In this case, rental invoices will have to be issued net with reference to the Reverse Charge Mechanism.

Input taxes (e.g. on the purchase or expenses related to the property) can only be recovered by using the special VAT refund procedure. However, in this case, the special VAT refund procedure can only be carried out if the foreign investor has a foreign (EU-)VAT number.

In these cases, the property is rented out to private customers directly without involving an operating company; nothing has changed with regard to invoicing. These rentals are taxable in Austria and the lessor is obligated to register for VAT in Austria.

Currently, there are some uncertainties with this new regulation. In the case of foreign lessors who have a valid VAT number, it is not clear how the tax office will handle this situation with regard to analysing the individual VAT status of the lessors. However, to avoid unpleasant surprises, foreign investors should use their own initiative to ascertain if the handling of their property rental is being carried out correctly.

The bottom line of this current situation is that a reaction of the tax authorities to this new situation is to be expected. Either there will be a technical solution which will enable foreign investors to receive Austrian VAT credits without using a foreign VAT number or there will be a legal solution which will establish the previous conditions. There is no doubt that the tax authorities in Austria are very unhappy with the current situation, thus there will be a reaction. We can look forward to what happens next.

Read the WTS Global VAT Newsletter here.