Austria is a landlocked country in central Europe with a population of approximately 8.5 million. It is one of the most attractive countries in the world to live in. It combines economic and political stability, a clean and safe environment and an excellent infrastructure. It is bordered by the Czech Republic and Germany to the north, Hungary and Slovakia to the east, Slovenia and Italy to the south and Switzerland and Liechtenstein to the west. Austria’s territory covers approximately 32,400 square miles and is highly mountainous because of its location within the Alps. Historically speaking, the origins of modern-day Austria date back to the time of the Habsburg empire.
Austria has a GDP (PPP) per capita of approximately US$47,700, 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.
Austria is a member of the EU (including the eurozone and Schengen), the OECD and the WTO. Austria therefore offers the opportunity to become resident in the Schengen territory with minimal bureaucratic requirements.
In the worldwide ranking of cities based on quality of living conducted by the HR consultancy Mercer in 2016, Vienna is in first place, and has consistently been ranked among the top three in the past.
While Austria admittedly has high income tax rates, the fact that no wealth, gift and inheritance taxes are levied is often the reason for high net worth individuals to consider relocating to Austria.
i Income tax
For income tax purposes, Austrian tax law distinguishes between residents and non-residents. Individuals having a domicile or their habitual abode in Austria are considered as residents and are subject to unlimited income tax liability on their worldwide income.2 All other individuals (i.e., individuals having neither a domicile nor their habitual abode in Austria) are considered non-residents and are subject to limited income tax liability, only on their Austrian-source income.3 Citizenship is thus not decisive for the purposes of tax residency.
A domicile for tax purposes is maintained where a taxpayer has a dwelling place under circumstances that permit the conclusion that the taxpayer intends to keep and use it.4 Such dwelling place must consist of one or more rooms that are furnished for the purpose of living there regularly. In most cases, a dwelling place consists of rooms that are either owned or rented by the respective taxpayer. However, the legal title of the dwelling place is not decisive, but rather the factual possibility to make use of it. Thus, a hotel room or a holiday home can also qualify as a domicile. Merely having a dwelling place is not enough: in addition, there have to be circumstances that permit the conclusion that the taxpayer intends to keep and use it for a longer period of time (typically at least six months). A residence notification to the respective municipal authorities may, for example, serve as an indication thereof.
An habitual abode for tax purposes is maintained where a taxpayer stays under circumstances that 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.5 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 anywhere in Austria is decisive. Temporary stops in or visits to Austria do not result in an habitual abode in Austria. Furthermore, repeated short-term stays in Austria are generally not added up for the purposes of the six months clause.
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 centre 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) 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.
Tax rates and tax basis
An individual’s income is subject to progressive income tax, with the following rate bands applying:
- a up to and including €11,000: zero per cent;
- b over €11,000, up to and including €18,000: 25 per cent;
- c over €18,000, up to and including €31,000: 35 per cent;
- d over €31,000, up to and including €60,000: 42 per cent;
- e over €60,000, up to and including €90,000: 48 per cent; and
- f over €90,000: 50 per cent.6
Additionally, for the years 2016 to 2020, a new maximum tax rate of 55 per cent shall become applicable to income exceeding €1 million. Interest on bank accounts is subject to a flat rate of 25 per cent; interest on bonds, dividends on stocks, capital gains from financial instruments and income from derivatives are subject to a flat rate of 27.5 per cent; capital gains from real estate are subject to a flat rate of 30 per cent.7
The income tax base is defined as the sum total of the following categories:
- a income from agriculture and forestry;
- b income from professional and other independent services;
- c income from an active trade or business;
- d employment income;
- e investment income;
- f rent, lease payments and royalties; and
- g other specified income (including certain annuities and capital gains on private property).8
Certain personal allowances exist for the taxpayer and family members.9
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.10 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.
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.
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 advisers benefit from longer deadlines. An extension of the filing date is possible in justified cases.11
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.12
Preferential tax regime for persons relocating to Austria
Pursuant to Section 103 of the Austrian Income Tax Act, the Austrian Minister of Finance may eliminate an additional tax burden resulting from an individual’s relocation to Austria, namely for people whose relocation to Austria serves the promotion of science, research, arts or sports and is thus in the public interest (additionally, in the case of scientists and researchers, 30 per cent of their income may be exempted from tax for five years). The Austrian Minister of Finance may prescribe such regulations as may be necessary or appropriate to carry out these provisions. In this respect, the draft of a regulation has recently been made available, which deals with certain procedural and substantive issues in connection with the above-mentioned provision.
First, the draft deals with the mandatory content of an application for preferential tax treatment (which generally has to be submitted before the individual’s relocation to Austria, but at the latest, six months thereafter). Second, the draft defines in which cases the relocation to Austria of a scientist, researcher, artist or athlete serves the public interest. Third, it outlines in detail how an additional tax burden resulting from an individual’s relocation to Austria (which, as described above, is a high-tax country) is to be eliminated: non-Austrian sourced income is to be subjected to a flat tax rate. This is determined by dividing the individual’s non-Austrian taxes paid in the three years prior to the relocation through its non-Austrian income earned in this period of time, with a minimum rate of 15 per cent applying. After 10 years, the flat rate rises by two percentage points per year; the preferential regime ends once the tax rate reaches at least 48 per cent. Interestingly, if a taxpayer avails himself or herself of the flat rate on non-Austrian sourced income, double-tax treaties may not be relied on (clearly a treaty override). Finally, the draft stipulates the cases in which the preferential tax treatment is prematurely forfeited (e.g., if the individual ends his or her relevant activities).
ii Wealth tax
Austria does not levy a general wealth tax on all types of personal assets. A special type of wealth tax only on Austrian real estate is currently being levied by the Austrian municipalities.13
iii Gift and inheritance tax
Austria does not currently levy a gift or inheritance tax. Such taxes were abolished in August 2008. There have been ongoing political discussions regarding a reintroduction, but since 2008 the coalition parties have not come to a consensus.
A special notification obligation exists for gifts of money, receivables, shares in corporations, participations in partnerships, businesses, moveable tangible assets and intangibles.14 The notification obligation applies if the donor or the donee has a domicile, habitual abode, legal seat or 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 per cent 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 €50,000 per year applies; in all other cases, a notification is obligatory if the value of gifts made exceeds €15,000 during a period of five years. Furthermore, gratuitous transfers subject to Austrian foundation entry tax are exempt from the notification obligation.
The sale of Austrian real estate triggers real estate transfer tax of normally 3.5 per cent,15 with the tax basis being the sales price. Similarly, gifts and inheritances of Austrian real estate are also taxable. In case of transfers between relatives, the tax basis of such transactions is the value of the transferred real estate with the tax rate being:
- a 0.5 per cent for amounts between €0 and €250,000;
- b 2 per cent for amounts between €250,000 and €400,000; and
- c 3.5 per cent for amounts over €400,000.
Gifts and inheritances of assets to Austrian private foundations are generally subject to a foundation entry tax at a rate of 2.5 per cent.
iv Bank confidentiality and exchange of information between tax authorities
Bank confidentiality is a highly cherished tradition in Austria and a very emotional topic for the public at large. It was introduced into statutory law in 1979. Although the provisions were originally quite strict, they have in the last few years been progressively loosened, mainly because of pressure from abroad regarding taxation. The starting point for this development was certainly the passing of the EU Savings Directive. In 2009, this was followed by the OECD’s push for facilitating the cross-border exchange of banking information upon request between tax authorities, and in 2014, by the expanded initiative to exchange such information automatically between tax authorities under what is known as the Common Reporting Standard. Finally, in 2015, as a direct result of the concessions made in an international context by granting foreign tax authorities access to Austrian banking information, the scope of Austrian bank confidentiality in a purely domestic tax context was dramatically eroded. Today, bank confidentiality in Austria pales in comparison with former times.
i Introduction to succession
There are two different approaches that could be decisive for the allocation of a deceased person’s estate. The first principle is that of family succession, according to which the estate shall be distributed among the family members of the deceased. This is based on the consideration of blood relationship on the one hand and on cohabitation and joint housekeeping on the other. The second principle is the idea of unrestricted disposal, which shall allow the testator to provide for an allocation that he or she deems reasonable.
Austrian succession law reflects elements of both principles. If a person passes away without having left a will, it is the closest relatives who are legal heirs: usually the children of the deceased person, his or her spouse or his or her ‘registered partner’ (a registered partnership is a comparably new concept, similar to a marriage, that has been introduced for same-sex life partners). Under particular circumstances, the parents or siblings of the deceased can also be legal heirs.
The share of a legal heir in the estate depends on the relationship to the deceased. If the deceased was married and had children, the surviving spouse is entitled to one-third of the estate and the children to the remainder in equal shares. If the deceased was married but had no children, the spouse would be entitled to two-thirds, whereas the parents of the deceased would be entitled to one-third.
Generally, a testator is free to deviate from the statutory concept outlined above, but must take into account the ‘compulsory portion’. This means that a certain group of persons (statutory heirs) is entitled to claim a portion of a deceased’s estate, even if there is a conflicting testamentary disposal or contractual agreement. There are only very limited grounds for which a testator could deprive statutory heirs of their compulsory portion. In terms of Austrian succession law, statutory heirs are descendants of the deceased and his or her spouse or registered partner. In the absence of descendants, ascendants are also statutory heirs.
Moreover, Austrian succession law comprises a variety of rigid provisions safeguarding that testators cannot diminish their estate to the detriment of the statutory heirs. As a consequence, even donations that have been effected well before the death of a testator can be taken into account upon the request of statutory heirs when determining their compulsory portion. Although time limits for such claims may apply, the legal position of statutory heirs is well protected.
The compulsory portion is typically half of the statutory quota (see above); in particular cases it can decrease to one-third.
Acquisition of the estate by the legal successors
Once a person passes away, that person’s rights and obligations are assumed by his or her estate. The estate is deemed a legal entity that is either represented by the legal heirs or a court-appointed administrator. The estate ceases to exist once probate proceedings are completed and the heirs assume the estate’s rights and obligations. Such transfer of rights and obligations to the heirs does not happen by way of law, but requires an explicit declaration to be given by the heirs in writing upon the probate court’s request within an adequate time, not exceeding one year.
ii Key legislative changes affecting succession
As of 1 January 2017, a considerable part of the provisions of succession law comprised by the Austrian Civil Code (which dates back to 1811) will be amended and modernised.
The main changes are the following:
- a The rescission of the compulsory portion of the ascendants of a testator.
- b The position of life partners will be strengthened.
- c The due date of the compulsory portion will be able to be deferred for up to five years (10 years in exceptional cases). This should avoid fire sales of companies or family businesses caused by liquidity shortages, following claims of statutory heirs who have not received sufficient assets from the estate to cover their compulsory portion.
iii Relevant cross-border developments
On 17 August 2015, the European Regulation on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession entered into force.
This meant a significant change to the existing Austrian legal framework in succession matters, which essentially referred to the citizenship of a testator, rather than to its habitual residence at the time of death, to answer the question of jurisdiction and of the applicable substantial law. Practical experience still needs to show whether the regulation indeed facilitates the handling of cross-border inheritance matters. Up until now, case law is, of course, still rare and many questions are yet unanswered.
IV WEALTH STRUCTURING & REGULATION
i Private foundation
The most important wealth-structuring vehicle used in Austria is the private foundation. This is a legal entity without owners or shareholders that is endowed with assets by the founder and that, by way of the use, management and investment of its assets, shall serve a legally valid purpose determined by the founder.16 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.17 A private foundation has legal personality.
The private foundation may serve any permissible purpose. The purpose can be freely chosen by the founder, but must be described in such a way that it may serve as a general guideline for the actions of the bodies of the private foundation. In practice, the financial support of the beneficiaries as well as the preservation, investment and administration of assets are the most common purposes. However, a private foundation must not be founded with the sole purpose of preserving its assets. Further, it has to be noted that a private foundation may neither carry out a commercial activity exceeding a mere ancillary activity nor be a shareholder with unlimited liability of a registered partnership.18
A private foundation can be set up both inter vivos or mortis causa. The founder has to be designated in the deed of foundation with his or her name, address and date of birth. In addition, the deed of foundation has to contain the following information:19
- a the endowment (at least €70,000);
- b the purpose of the private foundation (e.g., financial support of the beneficiaries);
- c the designation of the beneficiaries or of a body that has to determine the beneficiaries;
- d the name of the private foundation (which must contain the wording ‘Privatstiftung’);
- e the seat of the private foundation (which must be in Austria); and
- f the term of the private foundation (which may be limited or unlimited).
The deed of foundation may further include provisions regarding the appointment, revocation and office period of members of the bodies (board of directors, auditor and supervisory board, if any), the establishment of an optional supervisory board or of further bodies to ensure the pursuit of the purpose of the private foundation (e.g., advisory board). Certain rights of the founder have to be contained in the deed of foundation to be valid, such as the right of amendment of the deed of foundation, the admissibility of the setting up of a supplementary deed of foundation, as well as the right to revoke the private foundation. Furthermore, the deed of foundation may contain rules on the determination of beneficiaries, as well as of ultimate beneficiaries.
Some provisions can be contained in the supplementary deed of foundation, which does not need to be disclosed to the commercial register and thus to the public. The supplementary deed of foundation usually contains provisions regarding the types and amounts of distributions by the private foundation to beneficiaries and further endowments exceeding the minimum endowment of €70,000.
ii Tax aspects of private foundations
In connection with private foundations, three levels of taxation exist, namely:
- a The taxation of endowments to a private foundation – gratuitous endowments to a private foundation are subject to foundation transfer tax at, in general, a rate of 2.5 per cent of the fair market value of the assets endowed.
- b The taxation of income on the level of the private foundation – the private foundation is generally subject to corporate income tax at a rate of 25 per cent, with dividends received generally being tax-exempt. Some types of income (such as interest income) are instead subject to a 25 per cent interim tax. Interim tax is not payable if and to the extent certain distributions are made.
- c The taxation of distributions to beneficiaries – distributions of any kind to a beneficiary being an individual are subject to a withholding tax of 27.5 per cent, having the effect of final taxation. In contrast, distributions of substance may normally be effected tax-neutrally. Distributions to beneficiaries resident outside of Austria for tax purposes can ultimately be effected free of Austrian tax under many double taxation treaties.
iii Tax aspects of trusts
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 much guidance has been given by the tax authorities concerning the tax consequences of setting up a trust, being a beneficiary of a trust and receiving benefits from a trust. In addition, until recently, not much scholarly literature had been written on this topic.
Depending on their set-up, trusts can be seen for income tax purposes as either non-transparent (i.e., separate taxable entity) or 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 (1) in the case of a testamentary trust; (2) in the case of an inter vivos trust where he or she dies after setting up the trust; and (3) in the case of a discretionary trust where he or she has transferred the entire management to the trustees (who have full discretion) and where he or she has only determined the beneficiaries.20 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 or her death (except, obviously, if the beneficiaries had no knowledge of the trust or their rights).
V CONCLUSIONS & OUTLOOK
Austria, as a wealthy and sophisticated jurisdiction with a stable political system in the centre of the EU, remains a strong candidate for attracting high net worth individuals in the years to come.
1 Niklas JRM Schmidt and Karl Binder are partners at Wolf Theiss.
2 Cf. sec. 1(2) of the Austrian Income Tax Act.
3 Cf. sec. 1(3) of the Austrian Income Tax Act.
4 Cf. sec. 26(1) of the Austrian Federal Fiscal Procedures Act.
5 Cf. sec. 26(2) of the Austrian Federal Fiscal Procedures Act.
6 Cf. sec. 33(1) of the Austrian Income Tax Act.
7 Cf. secs. 27a and 30a(1) of the Austrian Income Tax Act.
8 Cf. sec. 2(3) of the Austrian Income Tax Act.
9 Cf. sec. 33 of the Austrian Income Tax Act.
10 Cf. sec. 78(1) of the Austrian Income Tax Act.
11 Cf. sec. 134 of the Austrian Federal Fiscal Procedures Act.
12 Cf. sec. 45 of the Austrian Income Tax Act.
13 Cf. sec. 1 of the Austrian Land Tax Act.
14 Cf. sec. 121a of the Austrian Federal Fiscal Procedures Act.
15 Cf. sec. 1(1)(1) of the Austrian Real Estate Transfer Tax Act.
16 Cf. sec. 1(1) of the Austrian Act on Private Foundations.
17 Cf. sec. 7(1) of the Austrian Act on Private Foundations.
18 Cf. sec. 1(2) of the Austrian Act on Private Foundations.
19 Cf. in detail sec. 9(1) of the Austrian Act on Private Foundations.
20 Cf. Austrian Supreme Administrative Court, 20 September 1988, 87/14/0167; EAS 2378; EAS 2804.