Prevention of double taxation between Croatia and Austria

29. June 2023 | Reading Time: 2 Min

For all directors/board members of Croatian companies, if they are tax residents of the Republic of Austria and receive compensation from a Croatian company.

Based on the previous procedure of the Austrian Tax Administration, the income of Austrian residents for their function in a Croatian company was taxed in Austria. On the other hand, the Croatian Tax Administration considered that such income can be taxed only in Croatia. Due to different interpretation and application of the language of the Double Taxation Treaty (DTT), problems arose in the treatment and taxation of such income.

In a recent case, Austria decided that Croatia may fully tax the salary and other income of an Austrian resident as a board member/director of a Croatian company.
In this specific case, it was a director who lives in Austria and who took over the management function of the company which is a part of an international concern in Croatia. The director worked and lived in Austria and Croatia.

When applying the Double Taxation Treaty (DTT) between Austria and Croatia, it remains unclear which of the two countries will have the right to tax the salary of the board member.

  • According to the German text of the DTT and the practice of the Austrian Tax Administration, Article 15 of the DTT was applicable, pursuant to which the taxation of the director’s salary must be divided between Austria and Croatia, depending on where the work is actually performed.
  • If the director works, for example, 2 days a week in Croatia and 3 days a week in Austria, then 2/5 of the salary would be taxable in Croatia and 3/5 in Austria.
  • However, according to the Croatian text of the DTT and the current practice of the Croatian Tax Administration, Article 16 of the DTT is applicable, pursuant to which the director’s salary must be fully taxed in the country where the company is headquartered, i.e. in Croatia.

Croatia has the right to taxation

The Austrian Tax Administration has recently made it clear in an individual settlement that the English text of the DTT is decisive in this case. According to the Austrian Tax Administration, the content of the English text corresponds to the Croatian version. As a result, Croatia has the exclusive right to tax the Austrian director’s income from work in a Croatian company.

Exemption in Austria

The salary received for the position of a director of a Croatian company is exempted from income tax in Austria. This salary is taken into account for determining the progressive income tax rate only if there is other income in Austria (the progression provision).

Conclusion and significance for the business activities of international concerns

This kind of interpretation helps eliminate the ambiguities regarding taxation at the level of large international groups.
In all international groups, it was necessary to ensure that the income tax for directors and board members is paid in the right country and in the right amount, which was not the case until now.