The new Double Tax Avoidance Treaty with Austria came into force as of 3 February 2011.
The Treaty applies to taxation at source of profits made on and after 1 January 2012. Concerning other types of taxes, the Treaty is applicable as of 1 January 2011.
In contrast with the old treaty, the new Double Tax Avoidance Treaty with Austria entirely follows the structure of the Tax Convention Model of the Organization for Economic Co-operation and Development (OECD). In this regard the differences between the two treaties are considerable. Firstly, there are changes in the regime of taxation of dividends, distributed by a resident company in one country to a company residing in another country. Under the old Treaty provisions, the dividends were taxed only in the country of the resident company. The new Treaty provides for dividends to be also taxed in the country of the source of income, i.e. the country in which the tax arises, provided that the recipient of the dividends is a natural person or partnership of persons for the purpose of doing business, but is not a company – legal /corporate/ person. In this case the tax must not exceed 5% of the gross amount of the distributed dividend. Therefore, dividends distributed in favor of natural persons and partnerships are to be levied with a withholding tax of 5% in the country of source and also in the country where the distributing company is a resident entity.
It is important to note here that under the Bulgarian Law the term “partnership” is an entity defined within the meaning of Art.357 of the Obligations and Contracts Act. According to the legal theory this entity is a partnership of two or more persons established for conducting business activity and without being an independent legal /corporate/ person. On the other hand, the German text of the Treaty uses the term “personengesellschaft”, which is wider in its scope and includes many other legal forms for conducting business activities. Pursuant to the Austrian law the term covers not only the already mentioned partnership, the German equivalent of which is “Gesellschaft bürgerlichen Rechts GbR“, but also the personal commercial companies known from the Bulgarian Commerce Act, namely – the unlimited (general) and the limited (special) partnerships – known in the Austrian jurisdiction as the Offene Gesellschaft (OG) and the Kommanditgesellschaft (KG) respectively. At first glance it may seem that such a difference is likely to give rise to serious contradictions and misunderstanding in the implementation of the Treaty, as the partnership under the aforesaid Bulgarian Obligations and Contracts Act is fundamentally different from the above mentioned commercial partnerships, which pursuant to Art. 63, par. 3 of the Commerce Act, are legal /corporate/ persons by definition. However, under the Austrian law, these personal partnerships or “personengesellschaft” are not legal /corporate/ persons which makes them more of a kind closer to the legal form of the partnership under the Bulgarian Obligations and Contracts Act.
Moreover, one should also take note of the term used in the English translation of the Treaty, which is “partnership”. As is well known the anglo-saxon jurisdiction does not consider this legal form for conducting business activity to be an independent legal /corporate/ person. Hence the parties of the present Agreement intend to tax dividends distributed in favor of natural persons or other legal entities for performing economic activity, which are not independent corporate body entities. Under the Austrian law this includes personal partnerships as well. Under the Austrian law these are also the personal partnerships.
Tax treatment of interest under the Treaty follows the same line of logic. Under the old treaty with Austria interest was only taxed in the country of residence, whereas the new Treaty provides for the taxation of interest by 5% in the country of origin, too – i.e. in the country at source as well.
One should be aware that there are a number of exceptions to this rule. These exceptions include interest accrued to Oesterreichische Kontrollbank AG or any equivalent Bulgarian institution for the purpose of promoting exports, as well as interest charged in connection with the credit sale of any industrial, commercial or scientific equipment, or interest from any kind of loan given by a bank. The interest in these cases continues to be taxable only in the country of the resident entity.
The tax treatment of income from copyright and license fees and royalties has undergone considerable changes, too, compared to the old treaty. In the old treaty, royalties and license fees were taxed only in the country of residence. The new treaty provides for the taxation of this type of income in the country of origin, too – i.e. in the country at source, as well. The tax rate in the country at source of income must not exceed 5% of its gross amount.
Further, there is also a change in the tax treatment of income from the transfer of property. Under the old treaty, the income received in one country, transferred into shares and stock in the other country was taxable only in the country of residence of the seller. Under the new treaty, the income received from the transfer of shares and stock is to be also taxed in the country of issuance of these shares and stock.
This rule has two exceptions, namely when the income is from stock traded on recognized stock-exchange, or when the income is from shares and stock in a company where the transferor /assignor/ owns at least 20% of the property – the income is taxable only in the country of residence, while in the other cases, the income is taxable in the country at source also.
It must be pointed out here that the old treaty did not expressly provide for taxation of income that a resident natural person could receive as a member of a collective management body of a company in the other country. The new treaty makes express provision for taxation of such income, giving the country of residence of the company paying the income the right to tax that income.
In the end, I would like to highlight the difference between the two treaties concerning the legal treatment of the methods for avoidance of double taxation. As is well known, the double taxation avoidance methods are applied by the country of residence in the event a certain type of income is taxable in the country at source of income.
The old treaty stipulates the method for absolute exemption. By way of this method, the profit which could be levied in the country at source was mitigated in the country of residence. The method for exemption of taxes on profits in progression – mitigates them in the country at source. The profits relieved from taxes, according to the treaty with the country at source, can be taken in account when the remaining profits are levied in the country of residence The new Treaty with Austria, too, makes provision for the method of absolute exemption, but its scope does not include the income from dividends, interest, royalties and license fees, as well as income from the transfer of shares or stock.
After that income has been taxed in the country at source, the country of residence must provide a tax credit by deducting the tax paid by the other country, in the amount of the national tax that could be levied on the income that is taxable in the other country. This method is called ordinary tax credit. The new treaty provides for tax exemption of income in progression also.
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