On 7 May 2010, Austria and Serbia signed a double taxation agreement (DTA) with an additional protocol concerning certain articles of the DTA (business profits, interest and exchange of information). The DTA and the protocol will become applicable as of 1 January of the tax year immediately following the year in which both countries have informed each other through diplomatic channels that their respective ratification procedures have been accomplished. The earliest possible date for the DTA’s entry into force is 1 January 2011. Serbia has already completed its domestic ratification procedures (the President of the Republic of Serbia signed the ratification bill into law on 29 July 2010).
The DTA was signed in the German, Serbian and English languages, each text having equal authenticity. In case of any discrepancy in interpretation, the English text prevails.
Although the DTA closely follows the Organisation for Economic Co-operation and Development Model Convention (OECD MC), there are several differences. For example, there is a separate article on independent professional services (Article 14), which is based on the UN Model Convention.
Allocation of taxing rights rules
The taxation of business profits corresponds to Article 7 of the OECD MC. The protocol attempts to clarify the principles for attribution of the profits of an enterprise of one contracting state to its permanent establishment situated in the other contracting state. In general, the profits of a permanent establishment should not be determined on the basis of the total amount received by the enterprise, but should instead be determined on the basis of that amount received by the enterprise that is attributable to the actual activity of the permanent establishment. In cases of contracts for the survey, supply, installation or construction of industrial, commercial or scientific equipment or premises, or for public works, performed by an enterprise of one contracting state having a permanent establishment situated in the territory of the other contracting state, the protocol clarifies that the profits of such permanent establishment should not be determined on the basis of the total amount of the contract, but only on the basis of that part of the contract amount that is attributable to the part of the contract effectively carried out by the permanent establishment. The profits related to that part of the contract that is carried out by the head office of the enterprise is taxable only in the state of residence.
Dividends are subject to taxation at the general rate of 15% in the source country. A 5% rate applies in cases in which the beneficial owner of the dividend is a company (excluding partnerships), which directly holds at least 25% of the capital of the company paying the dividends.
Taxation of interest in the source state is limited to 10%. However, interest is fully exempt from taxation in the source state in cases in which interest is paid to the central or local government of the other state or the central bank, or financial institutions controlled or predominantly owned by the state at any level. The protocol provides for a type of most favoured nation clause, granted by Serbia to Austria regarding the taxation of interest. Specifically, Serbia committed to starting revision talks with Austria aimed at the revision of the 10% tax rate on interest should it sign a double taxation treaty with a member country of the EU that provides for a lower rate of interest taxation.
The taxation of royalties in the source state is permitted but limited. A maximum 5% rate applies to royalties paid in connection with the use of literary, artistic, and scientific works, including cinematographic films, or films or tapes used for radio or television broadcasting. For royalties paid in connection with the use of patents, trade marks, designs, models, plans, secret formulas or processes, as well as for the use (including lease) of industrial, commercial or scientific equipment, the maximum 10% rate applies. The definition of ‘royalties’ is wider than the corresponding definition in the OECD MC in that it also includes payments for the use of, or right to use, television films and tapes for television and radio broadcasting, as well as for the use of, or right to use, industrial, commercial or scientific equipment. The royalties have their source in the state in which the party paying royalties is resident (except in cases where such royalties are effectively connected with, and costs of their payment are borne by, a permanent establishment or a fixed base situated in the other contracting state).
Further, the taxation of capital gains corresponds to the solutions provided in the OECD MC.
Article 13, paragraph 2 of the DTA is, however, broader in scope than the corresponding article in the OECD MC, in that it also includes income from the alienation of assets of a fixed base for the provision of independent professional services.
Income derived from the performance of professional services or other independent services earned by a resident of one contracting state is taxable only in that state unless the resident has a fixed base regularly available to them in the other contracting state for the purpose of performing their activities, and only so much of the income as is attributable to that fixed base may be taxed in the other contracting state. In addition, if a person performing professional services stays in the other contracting state for a 183-day period or more in any 12-month period, commencing or ending in the fiscal year, then the contracting state may tax income derived from activities performed in that state. Professional services include, without limitation, independent scientific, literary, artistic, educational and teaching activities, as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.
Employment income is taxed in accordance with the OECD MC. However, if employment is exercised by a resident in one state in connection with a construction site, or construction or installation project, for 12 months in which such site or project does not constitute a permanent establishment situated in the other state, then such income may be taxed only in the residence state.
With respect to the taxation of income of artists and athletes, only the residence country has taxation rights for live performances given by such artists and athletes, as well as the legal entities managing orchestras, theatres and ballet groups within the cultural or sport exchange programmes approved by both states.
Pensions are generally taxed in the country of residence, with the exception of pensions earned on the basis of social security laws of the other state, which may also be taxed by that other state.
Elimination of double taxation
Austria eliminates double taxation generally by means of an exemption using the progression method, except for certain items of income (dividends, interest, royalties, capital gains from the sale of shares in real estate companies and social security pensions), which may be taxed in Serbia in accordance with the DTA provisions. Serbia applies the credit method with respect to any item of income that may be taxed in Austria under the DTA.
Non-discrimination, Mutual Agreement and Exchange of Information
The non-discrimination article of the DTA is in line with Article 24 of the OECD MC, with the exception that the scope of non-discrimination protection is limited only to taxes on income and capital to which the DTA applies.
The DTA provides for a mutual agreement procedure but without a mandatory arbitration procedure.
The exchange of information provision of the Treaty corresponds to Article 26 of the OECD MC, and in particular includes the exchange of banking information. The protocol sets out certain procedural rules and clarifies that the principles set out in the commentaries to Article 27 of the OECD MC will be used to interpret the exchange of information article of the DTA.