Austria: Income Tax – exemption with progression for non-residents

The Administrative Court recently decided that an exemption with progression is to be applied to persons with unlimited tax liability in Austria even if they are resident abroad. The decision is of great importance, as the application of the exemption with progression for non-residents is contrary to the previous administrative practice. The ruling is expected to lead to a greater tax burden and increased compliance costs for those affected.

Natural persons who have a residence or habitual abode in Austria are subject to unlimited tax liability in Austria. The unlimited tax liability extends to the entire world income, thus to all domestic and foreign income. Based on this tax claim, the tax rate to be applied to the domestic income is calculated according to the world income, in which the exemption with progression finds its legal basis within the country.

In Austria, the exemption with progression is not explicitly anchored in the law, but it necessarily results from the provisions in the Austrian Tax Act. Insofar as a double taxation treaty grants the state of residence the right to levy taxes from the income remitted to it for taxation at the rate corresponding to the world income, it is therefore mandatory to take the foreign income into account when determining the applicable tax rate.

In the present case, there is a cross-border situation between the Republic of Turkey and the Federal Republic of Austria, thus the double taxation agreement of 2009 concluded between the two states (DTA Austria-Turkey) applies. The taxpayer receives income from employment, which is partly earned in Austria, in Turkey and in other countries. The person had a residence in Austria, which resulted in unlimited tax liability in Austria. However, based on the center of vital interests in this case, residency was clearly in Turkey.

Due to the unlimited tax liability, the part of the income that was taxable in Turkey under this DTA was included in the calculation of the average tax rate in Austria for the 2018 assessment, applying the exemption with progression. The taxpayer filed an appeal against this procedure, arguing that Austria, as the source state, was not entitled to an exemption with progression on the foreign income.

The Administrative Court decided that the DTA Austria-Turkey does not prohibit the application of the exemption with progression for the source state (or in this case, the state in which the activity actually takes place). The DTA Austria-Turkey does not contain any regulations on the question of the exemption with progression for the source state. Subsequently, the Administrative Court ruled that when assessing the tax liability of cross-border situations, it must first determine whether the tax claim exists under domestic tax law. To establish the tax rate, the foreign income must also be taken into consideration, as the use of Turkish income for the determination of the tax rate is not prohibited in this DTA.

Typical cases that will be affected by the new ruling are, for example:

• Posting to Austria, with residence in Austria and income taxable both in Austria and abroad
• Taxpayers resident abroad with an Austrian second/holiday residence and foreign and domestic income (e.g. rental in Austria, non-self-employed activity in Austria)
• Domestic permanent establishment of a German trade or business that is subject to income tax

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