30. March 2026 Avoidance of Double Taxation: Exemption Method and Credit Method
One of the key challenges in cross-border activities is ensuring that the same income is not taxed simultaneously in two different countries. The Double Tax Treaties provided two methods – the exemption method and the credit method.
How Does Double Taxation Arise?
An individual who has a residence or habitual abode in Austria is subject to unlimited tax liability and is therefore considered tax resident in Austria. As a rule, Austria is entitled to tax the individual’s worldwide income.
If the same individual also earns income abroad, the source state may also levy tax on this income under limited tax liability. In the absence of bilateral agreements, this would result in double taxation of the same income.
To prevent such situations, Austria has concluded double taxation agreements (DTAs) with approximately 90 countries. These agreements determine, on the one hand, which state has the right to tax specific income (allocation of taxing rights) and, on the other hand, which method for avoiding double taxation applies—either the exemption method or the credit method.
The Exemption Method
Under the exemption method, income earned abroad is exempt from taxation in Austria. However, such income may still increase the tax rate applicable to the remaining Austrian income under the progression clause.
For this purpose, the entire worldwide income subject to progressive tax rates is used to calculate an average tax rate. This rate is then applied only to the income that is taxable in Austria.
Example
Mr A lives with his family in Vienna and works for an employer in Bratislava. He maintains a small apartment there and is therefore also considered tax resident in Slovakia. However, due to the centre of vital interests being in Austria—where he lives with his family—he is regarded as tax resident in Austria for tax purposes.
His income from Slovakia amounts to EUR 60,000, while his Austrian rental income amounts to EUR 15,000.
Austria exempts the EUR 60,000 from taxation but calculates the tax rate applicable on the income taxable in Austria (rental income) as if the total income were EUR 75,000. The resulting average tax rate is then applied to the Austrian rental income of EUR 15,000. No Austrian tax is levied on the Slovak income of EUR 60,000.
The Credit Method
If a DTA provides for the credit method, the foreign income—unlike under the exemption method—is taxed in the state of residence. However, the tax already paid abroad is credited against the Austrian income tax.
The credit is limited to the amount of Austrian tax that would be attributable to the foreign income (the so-called maximum credit).
In the context of employment income, the credit method is applied in particular in Anglo-American jurisdictions (USA, Canada, United Kingdom) as well as in Austria’s tax treaties with Switzerland, Sweden, Ireland and Italy.
Example
Ms K is tax resident in Austria and works for a Swiss employer. Her employment income amounts to EUR 50,000, on which wage tax has already been withheld in Switzerland. In addition, she earns income from self-employment in Austria amounting to EUR 10,000.
In Austria, tax is first calculated on the total income of EUR 60,000. The Swiss tax paid is then credited against the Austrian income tax, but only up to the amount of Austrian tax that would be levied on the EUR 50,000 of Swiss income.
If the foreign tax is lower than the Austrian tax, it can be fully credited. If it is higher, the excess tax burden remains with the taxpayer.
Unilateral Relief Measures under Section 48(5) of the Austrian Federal Fiscal Code (BAO)
If no double taxation agreement exists between two countries, or if a so-called qualification conflict arises (i.e. both states claim the right to tax the same income), Austria may unilaterally grant relief from double taxation under Section 48(5) BAO. However, the application of such relief is at the discretion of the tax authorities.
Conclusion
The exemption method and the credit method are key instruments for preventing double taxation.
Under the exemption method, foreign income is fully relieved from Austrian taxation but may increase the tax rate applicable to domestic income.
Under the credit method, worldwide income is initially taxed in Austria, with the foreign tax paid credited against Austrian tax. However, a residual double tax burden may remain—particularly if the foreign tax exceeds the Austrian tax attributable to the foreign income (maximum credit limitation), in which case the excess foreign tax cannot be credited.
Anyone earning income abroad should familiarise themselves with the relevant DTA provisions at an early stage or seek professional tax advice to avoid double taxation and to ensure proper compliance with reporting obligations.
Your ARTUS advisors will be happy to assist you (info@artus.at).
