Tax risks for managing directors in CEE

Have you taken on the role of managing director in CEE? Do you know that your salary may be taxed in the second country under certain circumstances?

In a recent case, it was decided that Croatia may tax the entire salary of an Austrian managing director.
The director lives in Austria and has taken over the managing directorship of a group company in Croatia. He therefore physically works in Austria and in Croatia.

Tax risks for managing directors due to unclear regulations in CEE

In the case of the double taxation agreement (“DTA”) between Austria-Croatia, it remains unclear which of the two states receives the right of taxation on the salary of the managing director.
According to the German text of the DTA, Art 15 is applicable, which means the managing director’s salary must be divided between Austria and Croatia depending on where the work is physically performed.

If the managing director works about 2 days per week in Croatia and 3 days per week in Austria, then 2/5 of the salary would be taxable in Croatia and 3/5 in Austria. So far, so good!
 
According to the Croatian text of the DTA, however, Art 16 is applicable, according to which the salary of the managing director must be taxed in its entirety in the state where the registered office of the company is located, i.e. in Croatia.

CEE has the right of taxation

The Austrian Tax Office recently clarified in an individual ruling that the English text of the DTA is decisive in this case. According to the Austrian Tax Office, the content of the English text corresponds to the Croatian version. As a result, Croatia has the exclusive right of taxation.

Tax advantage

The salary received for the role of managing director of the Croatian company is tax-exempt in Austria. This salary is only to be considered for determining the progressive income tax rate if there is other income in Austria (progression proviso).

This is good news for managing directors, because this interpretation could also be applicable to other CEE countries. That’s because income tax in CEE countries is often lower than in Austria.

Importance for corporations

Corporations should ensure that in all group companies wage tax deductions for executives and other employees who work across borders are made in the correct country and in the correct amount.

If you have any questions about tax optimisation options, we will be happy to advise you!