Startups may encounter cross-border situations for various reasons, such as expansion-related entry into a foreign market, foreign-based employees, or foreign founders. The range of tax issues is diverse and should be analyzed in advance to eliminate tax risks. A rough overview of selected potential tax issues is provided below.

Customary remuneration of a foreign subsidiary/permanent establishment

If they want to expand into the foreign market, startups often decide to establish a foreign branch or even establish a foreign subsidiary. For this purpose, certain services (e.g., know-how, HR, marketing, controlling, etc.) are provided to the foreign subsidiary, as well as the Austrian startup's product is made available for distribution in the foreign market (e.g., through a license agreement). Furthermore, even with foreign branches, it is important to ensure that the remuneration is customary at arm's length.

Such cross-border transactions (e.g., a domestic startup providing services to a foreign subsidiary) must be conducted at arm's length, comparable to those of third parties, to avoid tax risks, for example, due to profit increases or expense cuts. The decisive factors are the type of service in question, the functions/risks assumed by the participating companies, and the corresponding contractual documentation. Therefore, a separate analysis must be conducted for each type of service.

Tax residence of a foreign subsidiary or a foreign parent company – beware of tax risks in Austria!

The right to tax a company's annual profit generally lies with the country in which the company is domiciled. A company's tax residence is primarily determined by the so-called "place of business." The "place of management" is determined by where the key decisions regarding day-to-day business are demonstrably made.

It is therefore always important to ensure that foreign subsidiaries or foreign parent companies with Austrian subsidiaries have local managing directors or rent an office. Otherwise, the Austrian tax authorities could (also) tax these foreign companies with Austrian corporate income tax – potentially leading to problems of multiple taxation!

Permanent establishment risk due to foreign employees – tax risk abroad

Not only in the context of the “war of talents” for employees for key positions, but also for all other employees, it may happen that a suitable employee for a vacant position at an Austrian startup is found abroad.

Foreign employees who are directly employed by the Austrian startup can, under certain circumstances, establish a (home office) permanent establishment abroad for income tax purposes and thus lead to a proportional – albeit often small – tax liability abroad.

Therefore, a preparatory analysis is essential (e.g. are there office premises, what activities does the respective employee perform in relation to the core activities of the startup, does the employee have [economic] authority to conclude transactions).

Temporary stay abroad or relocation of founders or employees

For various reasons, founders or employees may temporarily or permanently relocate from Austria (e.g., cross-border expansion of a startup, new professional priorities following an exit transaction in Austria or abroad, family reasons). This raises the question of the associated tax consequences (keyword: "exit taxation").

In this context, the general conditions should be examined in detail (e.g., are there assets subject to exit tax [e.g., securities, shares in the startup], is an EU/EEA/third country involved, under what conditions does the move/stay abroad take place [e.g., is family accompanying, is there an intention to return, is Austrian residence being retained, etc.]).

Conclusion

Startups can therefore be confronted with cross-border tax issues in numerous situations. A preparatory tax analysis is essential to avoid subsequent negative tax consequences.

This article was written by David Gloser (Partner, Tax Advisor and Auditor) and Christoph Puchner (Partner and Tax Advisor) of ECOVIS Austria. ECOVIS Austria is one of Austria's leading tax consulting firms in the startup sector. www.ecovis.at