22. May 2023 The previous administrative and interpretative practice in Austria was to consider tax-exempt foreign income as progressive income only in the state of residence, i.e. in the state with which the closest personal and economic ties exist. The ruling of the Administrative Court of 7.9.2022 (Ra 2021/13/0067) has now changed this. Now the source state can use the taxpayer’s progressive income to calculate the applicable tax rate, provided the taxpayer has unlimited tax liability there (= domicile or habitual residence), even without being a tax resident there. This has an impact above all on taxpayers resident in Austria with an Austrian employer who have their centre of vital interests abroad and work from there in a home office.
Facts of the matter
In the specific case, a taxpayer resident in Turkey and domiciled in Austria received income from an Austrian employer. The professional activity was carried out partly in Austria, partly in Turkey and partly in third countries. Although the Austrian tax authorities exempted the income attributed to Turkey’s right of taxation from income tax in Austria, they used it to calculate the tax rate to be applied to the Austrian income in Austria (= progression proviso), which, according to previous administrative practice, was only reserved for the state of residence.
Decision of the Federal Supreme Finance Court
A complaint was then filed, which was dismissed by the BFG. The reason given was that according to § 1 para. 2 EStG there was unlimited tax liability and therefore Austria was entitled to the right of taxation on world income. This was supported by two Administrative Court rulings, although the facts of these cases were different (in both cases Austria was the country of residence and not the source country). Furthermore, it was argued that no inadmissibility of the progression proviso can be derived from the double taxation agreement (DTA) with Turkey. The explanations to the OECD Model Tax Convention also did not indicate anything to the contrary.
Decision of the Administrative Tribunal
The taxpayer subsequently filed an extraordinary appeal with the Administrative Court, which, however, dismissed the appeal. The VwGH ruled that according to Austrian law (§ 1 para. 2 EStG), Austria had the right to tax the world income in the case of unlimited tax liability. Although the foreign income was to be exempted according to the DTA, it was to be taken into account when determining the tax rate to be applied to the income taxable in Austria. The DTA with Turkey does not expressly prohibit this. This has the consequence that the tax rate to be applied to the Austrian income is increased.
In domestic law, the progression proviso can be derived insofar as the Income Tax Act provides for the calculation of the tax rate from the (total) income. Although the DTA leads to the fact that the taxation of income taxable abroad is withdrawn from domestic taxation, it does not lead to the fact that the progression proviso can be avoided in the source state (idF Austria). The DTA with Turkey only refers to the State of residence in the method article; the source State is not mentioned. In this respect, the application of the progression proviso is not restricted in the DTA. This is also not likely to be the case in any of the agreements concluded with Austria.
The Second Residence Ordinance will therefore gain in importance again in the future. According to this ordinance, a person is considered to be subject to limited tax liability if a domestic dwelling is demonstrably not used for more than 70 days in a calendar year and the centre of vital interests is located abroad for at least 5 calendar years. Thus, there is no unlimited tax liability and the progression proviso is not applicable. Due to the addition amount to be applied in this case, if applicable, according to § 102 para. 3 EStG, a favourability comparison would make sense.
For example
A taxpayer with a small flat rented (for professional reasons) and employer in Austria (=employer state) lives with his family (wife and child) in Slovakia (=resident state). He commutes weekly between his place of residence in Slovakia and his workplace in Austria. On Mondays to Wednesdays he carries out his work in Austria (and therefore uses his Austrian home during this time), on Thursdays and Fridays he works in his home office in Slovakia.
The income attributable to working days in the home office is taxable in Slovakia, the income attributable to working days in the employer state Austria is taxable in Austria. The taxable income is distributed as follows:
Austria: EUR 45,000
Slovakia: EUR 30,000
Tax burden in Austria before the Administrative Court ruling: EUR 11,040.00
Tax burden in Austria after Administrative Court ruling: EUR 14,634.00
Tax optimization can be achieved, if necessary, by reducing the number of working days in the employer’s country Austria to 1-2 working days per week and making use of the secondary residence regulation (residence in Austria may not be used for more than 70 days per calendar year). The taxpayer would then be considered to be subject to limited tax liability in Austria and, insofar as the income attributable to Austria is already properly taxed within the framework of payroll accounting, there would be neither an addition pursuant to § 102 EStG (this only applies in the case of an application for assessment) nor the application of the progression proviso.
Conclusion
Taxpayers with residence in Austria (= unlimited tax liability) and family abroad (= residency abroad) must expect a higher tax burden in Austria in the future, if there is income subject to tax abroad. The reason for this is that according to the Administrative Court ruling of 7.9.2022, foreign income can be taken into account when calculating the tax rate to be applied to Austrian income (= progression proviso), even if the taxpayer is not resident in Austria. An optimization of the tax burden can be achieved if the prerequisites are met by making use of the Secondary Residence Ordinance.
The Administrative Court ruling therefore also required a change in administrative practice with regard to the consideration of the progression proviso for persons not resident in Austria but with unlimited tax liability. This change was incorporated into the guidelines with the EStR Maintenance Decree 2023 (from margin no. 7588 ff and margin no. 326). Income for which a DTA assigns the right of taxation to a foreign country must now – contrary to previous administrative practice – be taken into account for the determination of the applicable tax rate for persons with unlimited tax liability in Austria.
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