Austrian taxation of foreign sole proprietors: the difference between working from Austria and operating a permanent establishment abroad
Many individuals who move to Austria maintain their sole proprietorship registration in another country, such as a Ukrainian FOP.
However, maintaining a foreign business registration does not automatically mean that business profits remain taxable exclusively in that country.
The decisive factors are where the business activities are actually performed and whether the sole proprietor maintains a permanent establishment abroad.
Two situations must be distinguished.
1. A Foreign Sole Proprietor Working from Austria
Consider a Ukrainian sole proprietor providing IT services.
After moving to Vienna, the individual continues working for the same clients, issues invoices through the Ukrainian FOP and receives payments into a Ukrainian bank account.
However, all services are actually performed from the individual’s home in Austria.
There is no operating office, business premises or other fixed place of business in Ukraine through which the activities are carried out.
In this situation, the foreign registration alone does not establish a foreign permanent establishment.
If the individual is an Austrian tax resident, the profits from the activities performed in Austria will generally be subject to Austrian income tax.
The location of customers, bank accounts and invoicing arrangements does not, by itself, change this conclusion.
Under Section 1(2) of the Austrian Income Tax Act, individuals resident in Austria are generally subject to unlimited income tax liability on their worldwide income, subject to applicable double taxation agreements.
Is Austrian Business Registration Required?
A sole proprietor who regularly carries out business activities from Austria must comply with the applicable Austrian registration, tax and social security requirements.
Depending on the nature of the activity, this may include trade registration, registration with the Austrian tax authorities and social security registration.
Certain professional activities are governed by specific rules and may not require trade registration.
Maintaining a foreign sole proprietorship does not generally replace the registration requirements applicable to business activities actually conducted in Austria.
2. A Foreign Sole Proprietorship with an Operating Business Abroad
A different situation arises when an individual moves to Austria but continues operating an established business in another country.
For example, an Austrian tax resident owns a retail store in Ukraine.
The store has commercial premises, inventory, equipment and employees. A locally appointed manager supervises its daily operations.
Although the sole proprietor lives in Austria, the store continues operating in Ukraine.
Such an arrangement will generally constitute a foreign permanent establishment under the relevant double taxation agreement.
Under Article 5 of the OECD Model Tax Convention, a permanent establishment generally means a fixed place of business through which an enterprise’s business is wholly or partly carried on.
Under the principles of Article 7, the country where the permanent establishment is located may tax the profits attributable to that establishment.
Consequently, the profits attributable to the Ukrainian retail business may be taxed in Ukraine, even though its owner resides in Austria.
Austria must then apply the double taxation relief mechanism provided by the relevant treaty.
Where the exemption method applies, the qualifying foreign permanent establishment profits are generally exempt from Austrian income tax, but may be taken into account when determining the progressive tax rate.
Where the credit method applies, Austria generally taxes the income while allowing a qualifying foreign tax credit within the applicable limits.
3. Foreign Registration Does Not Automatically Create a Permanent Establishment
A foreign sole proprietorship registration or foreign tax number is not sufficient to establish a permanent establishment.
The actual business circumstances must be examined, including the existence of a fixed place of business and the functions carried out there.
A software developer working exclusively from Vienna is therefore in a fundamentally different tax position from a sole proprietor whose foreign retail store continues operating with employees and local management.
Only profits properly attributable to the foreign permanent establishment qualify for the corresponding treaty treatment.
4. Must Foreign Sole Proprietorship Profits Be Declared in Austria?
Yes. Austrian tax residents must generally disclose relevant foreign business profits in their Austrian income tax returns, including profits exempt under an applicable double taxation agreement.
Where the exemption-with-progression method applies, foreign profits are considered when determining the tax rate applicable to Austrian taxable income.
Example: A sole proprietor earns EUR 30,000 in taxable Austrian business profits and EUR 50,000 in profits attributable to a foreign permanent establishment.
If the applicable treaty provides for exemption with progression, the foreign profits are not directly taxed in Austria but may increase the tax rate applied to the Austrian income.
The precise treatment depends on the applicable treaty and Austrian tax rules.
5. Two Sole Proprietors – Different Tax Consequences
| Working from Austria | Operating a Business Abroad | |
| Foreign business registration | Yes | Yes |
| Actual business operations | Austria | Foreign country |
| Foreign business premises | No | Yes |
| Foreign employees and local manager | No | Yes |
| Foreign permanent establishment | Generally no | Generally yes |
| Taxation of profits | Generally Austria | Foreign PE state; Austrian treaty relief |
| Austrian tax reporting | Yes | Yes |
6. How steuerexperten.at Can Help
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steuerexperten.at – Professional Austrian tax advice for international sole proprietors.
Legal references: Sections 1, 2 and 23 of the Austrian Income Tax Act; Section 29 of the Austrian Federal Fiscal Code; Articles 5 and 7 of the applicable double taxation agreement and its double taxation relief provisions.
