Some Austrian tax aspects relevant for individuals moving to Austria

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1 MEMORANDUM From: Niklas Schmidt Re: 1. General 29 August 2014 Some Austrian tax aspects relevant for individuals moving to Austria 1.1 Austria is a landlocked country in Central Europe with a population of approx. 8.5m. It is bordered by the Czech Republic and Germany to the North, Hungary and the Slovak Republic to the East, Slovenia and Italy to the South, and Switzerland and Liechtenstein to the West. Austria's territory covers approx. 32,400 square miles, and is highly mountainous due to its location within the Alps. Historically speaking, the origins of modern-day Austria date back to the time of the Habsburg empire. WOLF THEISS Rechtsanwälte Schubertring Vienna Austria T F wien@wolftheiss.com WOLF THEISS Rechtsanwälte GmbH & Co KG UID: ATU ; DVR: ADVM: P130664; FN b FG: HG Vienna; Seat: Vienna 1.2 Austria has a GDP (PPP) per capita of approx. USD 43,800, making it one of the richest countries in the world. Major industries in Austria are tourism, banking, foodstuffs, luxury commodities, mechanical engineering, steel construction, chemicals and vehicle manufacturing. 1.3 Austria is a member in particular of the EU (including the Eurozone), the OECD and the WTO. 1.4 In the worldwide ranking of cities regarding quality of living conducted by the HR consultancy Mercer in 2014, Vienna is in the first place, and has consistently been among the top three in the past. 1.5 The Republic of Austria is composed of nine federal provinces. Austrian taxes are mostly levied on a federal level. No state or provincial tax is levied on an individual's income. Federal taxes are administered by the Austrian Minister of Finance (Bundesministerium für Finanzen; cf. and its subordinate tax offices. 1.6 The main sources of tax law are firstly various tax acts enacted by the Austrian Parliament (e.g., the Austrian Income Tax Act [Einkommensteuergesetz], the Austrian Corporate Income Tax Act [Körperschaftsteuergesetz], the Austrian Value Added Tax Act [Umsatzsteuergesetz] and the Austrian Federal Fiscal Procedures Act [Bundesabgabenordnung]). Secondly, the Austrian Minister of Finance may issue ordinances which have to be in line with tax acts, but may further determine ALBANIA AUSTRIA BOSNIA & HERZEGOVINA BULGARIA CROATIA CZECH REPUBLIC HUNGARY POLAND ROMANIA SERBIA SLOVAK REPUBLIC SLOVENIA UKRAINE Our operations in the various locations comply with the requirements of the relevant local law and local bar rules, including cooperation with independent local attorneys.

2 their content; these are binding on the taxpayers, the tax administration and the courts. Thirdly, the Austrian Minister of Finance may issue guidelines (e.g., the Austrian Income Tax Guidelines [Einkommensteuerrichtlinien]), which are, however, only binding on the tax offices (i.e., the first instance). In Austria precedents do not have binding authority for future cases, but especially cases decided by the Austrian Supreme Administrative Court (Verwaltungsgerichthof) in practice give guidance on how tax acts have to be applied. 2. Income tax 2.1 For income tax purposes Austrian tax law distinguishes between residents and non-residents: Individuals having a domicile (Wohnsitz) and/or their habitual abode (gewöhnlicher Aufenthalt) in Austria are considered as residents and are subject to unlimited income tax liability in Austria on their worldwide income (cf. sec. 1(2) of the Austrian Income Tax Act). All other individuals (i.e., individuals neither having a domicile nor their habitual abode in Austria) are considered as nonresidents and are subject to limited income tax liability only on their Austrian-source income (cf. sec. 1(3) of the Austrian Income Tax Act). Citizenship is thus not decisive for purposes of tax residency. 2.2 A domicile for tax purposes is maintained where a taxpayer has a dwelling place under circumstances which permit the conclusion that the taxpayer intends to keep and use it (cf. sec. 26(1) of the Austrian Federal Fiscal Procedures Act). Such dwelling place must consist of one or more rooms which are furnished for the purpose of living there regularly. In most cases a dwelling place consists of rooms which are either owned or rented by the respective taxpayer. However, not the legal title to the dwelling place is decisive, but rather the factual possibility to make use thereof. Thus, also a hotel room or a holiday home can qualify as a domicile. Just having a dwelling place is not enough; in addition, there have to be circumstances which permit the conclusion that the taxpayer intends to keep and use it for a longer period of time. A residence notification (Meldung) to the respective municipal authorities may for example serve as an indication thereof. 2.3 An habitual abode for tax purposes is maintained where a taxpayer stays under circumstances which permit the conclusion that the taxpayer intends to dwell there not only temporarily; staying in Austria for more than six months irrefutably leads to an habitual abode, even for the first six months (cf. sec. 26(2) of the Austrian Federal Fiscal Procedures Act). Whereas a taxpayer can have more than one domicile, it is never possible to have more than one habitual abode. It is not necessary to stay in the same municipality; rather dwelling somewhere in Austria is decisive. Temporary stops in Austria do not result in an habitual abode in Austria, e.g., in case of shortterm visits. Furthermore, repeated short-term stays in Austria are generally not to be added up for the purposes of the six months' clause. 2.4 However, apart from the statutory rules of the Austrian Income Tax Act attention also has to be paid to an ordinance regarding secondary residences issued by the Austrian Minister of Finance. Pursuant thereto, in case of taxpayers whose center of vital interests is outside of Austria for more than five calendar years, an Austrian dwelling place qualifies as a domicile only in such years in which the dwelling place is used (alone or together with other Austrian dwelling places) 2

3 for more than 70 calendar days. This rule is only applicable if the taxpayer keeps a list of the days during which the dwelling place is used. 2.5 An individual's income is subject to progressive income tax, with the following rate bands applying: (i) up to and including EUR 11,000: 0%; (ii) over EUR 11,000 up to and including EUR 25,000: 36.5%; (iii) over EUR 25,000 up to and including EUR 60,000: 43.21%; and (iv) over EUR 60,000: 50% (cf. sec. 33(1) of the Austrian Income Tax Act). Interest, dividends and capital gains from stocks, bonds and real estate are in general subject to a flat rate of 25% (cf. secs. 30b(1) and 93(1) of the Austrian Income Tax Act). 2.6 The income tax base is defined as the sum total of the following categories: (i) income from agriculture and forestry; (ii) income from professional and other independent services; (iii) income from an active trade or business; (iv) employment income; (v) investment income; (vi) rent, lease payments and royalties; and (vii) other specified income (including certain annuities and capital gains on private property) (cf. sec. 2(3) of the Austrian Income Tax Act). Certain personal allowances exist for the taxpayer and family members (cf. sec. 33 of the Austrian Income Tax Act). 2.7 While income tax is levied by way of assessment, income tax on employment income is generally levied by way of withholding by the Austrian employer (cf. sec. 78(1) of the Austrian Income Tax Act). Such wage tax is a prepayment of the employee's final income tax and is credited against the employee's assessed income tax liability if the taxpayer files (voluntarily or in certain cases on an obligatory basis) an annual tax return. 2.8 Austria does not provide for a married couples tax splitting concept. Husband and wife are rather taxed separately on a stand-alone basis with their respective individual income. 2.9 Individuals are obliged to file their income tax returns electronically; paper-based filing is only exceptionally permissible. The income tax return must be filed by 30 April or, if electronic filing is made use of, by 30 June of the following year. Taxpayers represented by tax advisors benefit from longer deadlines. An extension of the filing date is possible in justified cases (cf. sec. 134 of the Austrian Federal Fiscal Procedures Act) Quarterly pre-payments of income tax are due on 15 February, 15 May, 15 August and 15 November. Such pre-payments are creditable against the final amount of income tax assessed. Any balance is payable within one month after receipt of the corporate income tax assessment notice (cf. sec. 45 of the Austrian Income Tax Act). 3. Corporate income tax 3.1 Corporations are subject to corporate income tax and thus taxed as separately taxable entities. Partnerships, in contrast thereto, are treated as transparent for tax purposes; the income of a partnership is attributed to its partners and subject to income tax or corporate income at the level of the partners. 3.2 Corporate income tax is levied at a rate of 25% (cf. sec. 22(1) of the Austrian Corporate Income Tax Act). 3

4 3.3 A corporation's tax basis is the profit as shown in its financial statements (cf. sec. 7(2) of the Austrian Corporate Income Tax Act; sec. 5(1) of the Austrian Income Tax Act). In addition, where mandatory tax provisions deviate from financial accounting rules, adjustments have to be made. As a general rule, expenses incurred in acquiring, securing and maintaining taxable income are tax-deductible. 3.4 The Austrian Corporate Income Tax Act provides for a broad participation exemption covering dividends and capital gains from subsidiaries (cf. sec. 10 of the Austrian Corporate Income Tax Act), as well as a group taxation regime for affiliated companies (cf. sec. 9 of the Austrian Corporate Income Tax Act). 4. Double taxation treaties 4.1 Austria's right to tax may be restricted by double taxation treaties. Austria has concluded 84 double taxation treaties, including one with the United States of America. 4.2 Austria generally follows the OECD Model Convention and the commentary thereto in respect to its treaty policy and interpretation. 4.3 Since under Austrian interpretational rules, the more specific provision takes precedence over the more general provision, double taxation treaties generally take priority over domestic laws. 4.4 Pursuant to an ordinance by the Austrian Minister of Finance, unilateral relief from double taxation is generally also possible if Austria has not concluded a double taxation treaty with a specific country. 5. FATCA 5.1 Austria has concluded an intergovernmental agreement with the United States of America aiming at facilitating the implementation of FATCA, which is based on the so-called Model Value added tax 6.1 Austria levies a value added tax at a rate of 20%; a reduced rate of 10% applies in particular to foodstuffs and beverages, agricultural products, books, plants, works of art, transportation of persons and residential rent (cf. sec. 10 of the Austrian Value Added Tax Act). 6.2 Both Austrian resident and non-resident entrepreneurs must register and account for value added tax if they deliver goods or render services within the sphere of their enterprise in Austria and against consideration (cf. sec. 1(1)(1) of the Austrian Value Added Tax Act). 6.3 There are a number of exemptions applicable to certain supplies (e.g., financial services and health services); an exemption also applies for entrepreneurs having their domicile or legal seat in Austria if their yearly turnover subject to value added tax does not exceed EUR 30,000 (cf. sec. 6 of the Austrian Value Added Tax Act). 4

5 7. Wealth tax 7.1 Austria does not levy a general wealth tax on all types of personal assets. 7.2 A special type of wealth tax only on Austrian real estate is currently being levied by the Austrian municipalities (cf. sec. 1 of the Austrian Land Tax Act [Grundsteuergesetz]). 8. Gift and inheritance tax 8.1 Austria currently does not levy a gift or inheritance tax. Such taxes were abolished in August There have been political discussions regarding a reintroduction. 8.2 Gifts and inheritances (as well as sales) of Austrian real estate trigger real estate transfer tax of normally 3.5% (cf. sec. 1(1)(1) of the Austrian Real Estate Transfer Tax Act [Grunderwerbsteuergesetz]). While the tax basis here is generally the fair market value, the three-fold standard tax value (Einheitswert) capped at 30% of the fair market value applies in the case of transfers to spouses, registered partners, companions having the same residence, parents, children, grandchildren, stepchildren, adopted children and children in law. 8.3 Gifts and inheritances of assets to Austrian private foundations are subject to a foundation entry tax at a rate of 2.5% or 25% (cf. sec. 1(1) of the Austrian Foundation Entry Tax Act [Stiftungseingangssteuergesetz]) 8.4 A special notification obligation exists for gifts of money, receivables, shares in corporations, participations in partnerships, businesses, movable tangible assets and intangibles (cf. sec. 121a of the Austrian Federal Fiscal Procedures Act). The notification obligation applies if the donor and/or the donee have a domicile, their habitual abode, their legal seat or their place of effective management in Austria. Both the donor and the donee are obliged to effect the gift notification within three months from the donation. The notification has to be done electronically. Intentional violation of the notification obligation may lead to the levying of fines of up to 10% of the fair market value of the assets transferred. Not all gifts are covered by the notification obligation: In case of gifts to certain related parties, a threshold of EUR 50,000 per year applies; in all other cases, a notification is obligatory if the value of gifts made exceeds an amount of EUR 15,000 during a period of five years. Furthermore, gratuitous transfers subject to Austrian foundation entry tax are exempt from the notification obligation. 9. Wealth management vehicles 9.1 Neither the Austrian Income Tax Act nor the Austrian Corporate Income Tax Act contains explicit provisions dealing with trusts. Given the fact that Austria is a civil law jurisdiction, this is hardly surprising. The trust concept is actually alien to Austrian civil and tax law. Very few court cases exist and not a lot of guidance has been given by the tax authorities concerning the Austrian tax consequences of setting up a trust, being a beneficiary of a trust and receiving benefits from a trust. Also, until recently not a lot of scholarly literature had been written on this topic. 5

6 9.2 Depending on their set-up, trusts can be seen for Austrian income tax purposes as either nontransparent (i.e., separate taxable entity) or as transparent (i.e., look-through). Broadly speaking, non-transparency is the case if neither the settlor nor the beneficiary has comprehensive instruction and supervision rights regarding the management of the trust assets; the settlor for example has no such rights (i) in the case of a testamentary trust, (ii) in the case of an inter vivos trust where he dies after setting up the trust and (iii) in the case of a discretionary trust where he has transferred the entire management to the trustees (who have full discretion) and where he has only determined the beneficiaries (cf. Austrian Supreme Administrative Court, 20 September 1988, 87/14/0167; EAS 2378; EAS 2804). Transparency would for example be the case with bare trusts, where the trustee acts on the instruction of the beneficiaries and has to transfer the assets to them upon request; the same would be true if the settlor had strong rights regarding the trust assets and these were transferred to the beneficiaries after his death (except, obviously, if the beneficiaries had no knowledge of the trust or their rights). 9.3 In practice, Austrian tax residents typically use an Austrian private foundation (Privatstiftung) for wealth management purposes. This is a legal entity without owners or shareholders, which is endowed with assets by the founder and which, by way of the use, management and investment of its assets, shall serve a legally valid purpose determined by the founder (cf. sec. 1(1) of the Austrian Act on Private Foundations [Privatstiftungsgesetz]). The private foundation is established by way of a unilateral declaration of intent by the founder and comes into legal existence by way of registration with the Austrian commercial register (cf. sec. 7(1) of the Austrian Act on Private Foundations). * * * 6