CMS Tax News | October 2024
Many airlines have their registered offices in Malta for tax reasons. A recent decision of the Austrian Federal Tax Court (RV/7102502/2024 of 24 July 2024) will have far-reaching consequences for Austrians employed (e.g. as pilots) by such Malta-based airlines.
1. Facts of the case
In 2022, a pilot whose principal and usual place of residence was in Austria was employed by an airline whose registered office and place of effective management were in Malta. The Malta-based airline withheld Austrian income tax from the pilot’s salary for transfer to the Austrian Tax Authority. The pilot claimed an income tax refund from the Tax Authority, arguing that under the double taxation agreement between Austria and Malta (Malta DTA), his salary was not subject to tax in Austria.
2. Applicable legislation
In principle, Austria has a right to tax the pilot’s global income, given that he is a resident of Austria.
Under Art. 15(3) of the Malta DTA, remuneration for dependent personal services exercised aboard a ship or aircraft in international traffic may be taxed in the contracting state in which the place of effective management of the enterprise is situated. This means that under said article of the DTA, both states – Austria and Malta – have a right to tax such income (potential double taxation).
To avoid double taxation, the Malta DTA stipulates that the state of tax domicile – in this case, Austria – may either exempt such income from tax (exemption method) or may allow the amount of tax paid in the other state – in this case, Malta – as a deduction from its tax (deduction method).
Whether the exemption method or the deduction method is applicable to remuneration for dependent personal services under Art. 15(3) of the Malta DTA is at issue:
- Under Art. 23(1) of the Malta DTA, the exemption method applies to income that may “only” be taxed in the other contracting state (in our case, Malta). The problem is that the word “only” appears just in the German version, but not in the English version.
- The deduction method under Art. 23(2) of the Malta DTA is not applicable to remuneration for dependent personal services.
3. Legal view of the Austrian Tax Authority
Based on an express reply on international tax law by the Austrian Ministry of Finance, dated 17 November 2023 (EAS 3448), the Austrian Tax Authority held that Austria does not have to exempt such income from tax (i.e. that the exemption method is not applicable) because remuneration under Art. 15(3) of the DTA may be taxed not “only” in Malta, but also, in fact, in Austria.
4. Decision of the Austrian Federal Tax Court
The Austrian Federal Tax Court (in decision RV/7102502/2024 of 24 July 2024) allowed the pilot’s claim and ruled that his income must be exempted from tax in Austria. Fundamentally, it argued that the inclusion of “only” in the German version was a drafting error and that the English version therefore prevailed for purposes of interpreting the Malta DTA. Since the English version contains nothing to signify “only” in the relevant clause, Austria must exempt such income from tax.
While the Court’s decision is in line with the prevailing view in the legal literature, it goes against the Finance Ministry’s express reply cited above. Unsurprisingly, therefore, the Tax Authority lodged an appeal on points of law against the decision. The Supreme Administrative Court has yet to rule on this appeal.
5. Impact
The Federal Tax Court’s decision means that salaries paid to Austrian air crews by Malta-based employers cannot be taxed in Austria.
While Malta may tax such salaries, it does not exercise this right, so that the salaries are not taxed in any state (zero taxation).
6. Our recommendations
- If income tax has been withheld by the employer, affected employees should file a complaint with the Tax Authority, based on the argument that Austria has no right to tax such income, and should claim a full income tax refund.
- If past refund claims have been conclusively rejected, employees should check if there are still procedural options for annulment of the relevant administrative decisions and resumption of the procedure.
