In a recent case, the Austrian Fiscal Court had to decide whether withholding taxes that cannot be fully credited in the respective tax year can be carried forward to the following years.
An Austrian tax resident had been performing technical services in India, which were subject to an Indian withholding tax. The Austrian-Indian double tax treaty grants India the right to apply 10% withholding tax on technical services. As, however, the Austrian corporate income tax was substantially lower than the Indian withholding tax deducted in accordance with the treaty in all relevant years, the Austrian taxpayer was not able to fully credit the Indian withholding tax. As a consequence, the taxpayer applied to credit the Indian withholding tax in subsequent years.
The carryforward of withholding taxes to other years was denied by the Austrian tax authority and the Austrian Fiscal Court in the following. The court referred to preceding jurisprudence by the Austrian Supreme Administrative Court. Based on this case law, foreign withholding taxes must be credited in the year in which the corresponding income is recorded for tax purposes in Austria. According to the wording of the credit method in the respective double taxation treaties and the OECD Model Tax Convention, the credit must be applied to the taxes on the same income that was also subject to taxation in the source country. If the foreign tax were to be credited on Austrian tax in a subsequent year, such credit would no longer be applied to the same income but to other income. Moreover, to the extent that the legislator does not provide for a credit carryforward in domestic tax law, such a carryforward is not possible in Austria, according to the Supreme Administrative Court. So far, Austrian tax law only provides for a carryforward of withholding taxes for specific situations within Austrian CFC regulations and where the switch-over method from exemption to credit method is applied within the Austrian participation exemption regime.
Regarding the constitutional concerns raised, the Austrian Supreme Administrative Court rejected any concerns referring to a rejection decision by the Austrian Constitutional Court. In addition, it should be noted that, in the opinion of the Supreme Administrative Court, no necessity for the requested carryforward of withholding taxes can be derived even from European Union law, citing ECJ 10.2.2011, C-436/08 and C-437/08, Haribo and Österreichische Salinen.
Even though the cited decision by the Austrian Supreme Administrative Court concerned various other Austrian double tax treaties, the Fiscal Court made clear that the opinion of the Supreme Administrative Court would also apply to the Indian treaty. The case once again shows that withholding taxes are not to be taken lightly. They might ruin a once profitable project as soon as they become a cost factor that has not been included in the calculation of the respective project price.
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