Tax-free profit participations for employees
On 20 January 2022, the Austrian parliament approved tax-free profit participations for employees as part of the eco-social tax reform. If the legislation is passed, the measure will already apply to payments made in 2022. Many employers will be asking the following question: How can we make use of the tax benefit within existing bonus models?
To apply the tax exemption, the following prerequisites must be fulfilled:
Group criterion: The profit participation must be granted to all employees or specific groups of employees. Objective and justifiable criteria should be used to determine which groups of employees will receive profit participations. According to case law on capital participations from the Austrian Supreme Administrative Court (VwGH), job-specific criteria may, for example, be used to define groups. However, granting such participations based on grade, e.g. to all managers, might be tricky if the company decides who is appointed manager at its own discretion and no job-specific characteristics exist to distinguish the role.
Link to objective criteria such as KPIs: It is permissible for the bonus model to make the payment of profit participations contingent upon certain business-related KPIs being achieved (revenues, contribution margin, operating result, profit, etc.). Nevertheless, a link to an employee’s individual performance would contravene the group criterion.
Prohibition of conversion of salary to non-cash payments: The profit participation cannot be paid in lieu of a previously paid salary, or a standard salary increase. If the employer has previously voluntarily granted performance-based rewards (without any legal entitlement being created), no conversion of salary is deemed to exist under the legislation if these are replaced by a profit participation. It is therefore important to verify whether an entitlement to such performance-based rewards exists under labour law, for example due to standard company practice.
Total capped amount: If the total amount of annual profit sharing exceeds the company’s earnings before interest and taxes (EBIT) for the financial year that ended in the last calendar year, the excess amount will be subject to wage tax. If the employer does not determine its profit in accordance with § 5 Austrian Income Tax Act (“EStG”), reference should be made to the EBIT based on tax values, or, if cash accounting is used, the taxable profit of the previous year. If the profit participation is implemented throughout a company group, the group EBIT may also be used.
Wage regulations: The payment cannot be granted on the basis of a wage regulation under § 68 para 5 subpara 1-6 EStG. Any right to profit participation arising from a statutory provision, the collective bargaining agreement, or a works agreement under a collective bargaining agreement, would therefore prevent the tax exemption.
Tax-free profit participations of this kind may only be granted to active employees. No tax-free payments to retired or former employees are therefore possible. The exemption only applies to income tax (usually wage tax), but not to social security, the employer contribution (DB), the surcharge to the employer contribution (DZ), or municipal tax.
Before applying the tax exemption to your bonus model, several important aspects need to be clarified to avoid wage tax risks. We would be happy to support you during implementation.
