Tax Treaty Case Law around the Globe 2018

S. 331Chapter 28 Austria: Severance Payments and Subject-to-Tax Clauses

Christoph Marchgraber

28.1. Introduction

Upon the termination of an employment, the (former) employee may receive various payments from the (former) employer. In cross-border situations, it needs to be analysed which of the states involved has the right to tax such payments. With regard to severance payments, it is almost undisputed that such payments are covered by article 15 of the OECD Model. Thus, the residence state has the exclusive right to tax “unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State”.

According to the German Federal Fiscal Court (Bundesfinanzhof), severance payments are not “derived from” the employment that was formerly exercised. Rather, such payments are made because the (former) employee has lost his/her employment and not due to the former employment activities. The employment may hence be the reason for but not causally determine the severance payments. Therefore, severance payments may be exclusively taxed by the residence state of the (former) employee.

By contrast, the ...