Attention: Reminder regarding domestic exemption with progression

As the end of the tax year 2023 is coming closer, the tedious task of preparing tax documents for the Austrian Tax Authorities is underway.

In this context we would like to remind you of the decision Ra 2021/13/0067-5 of the Austrian Supreme Administrative Court (VwGH) from 7/9/2022, in which the VwGH has confirmed domestic exemption with progression in case of a foreign-resident taxpayer, thereby diverging from previous administrative practice.

What is the regulation on domestic exemption with progression about?

The exemption with progression determines that for calculating the standard tax rate also the parts of the worldwide income whose right to tax is granted to the other state under the double taxation agreement (DTA) are taken into account. In practice this means that Austria will tax the part of the income allocated to Austria with a tax rate based on the worldwide income, irrespective of whether Austria is the state of residence or the state of source.

The now clarified domestic exemption with progression arises from the principle of consistent taxation and the order in the Austrian Income Tax Act (EStG) that the tax rate is determined based on the worldwide income (calculated pursuant to the provisions of EStG).

The Austrian Tax Authorities have integrated the new decision in the Austrian Income Tax Guidelines and recommended application as of the tax year 2023.

Who is affected?

• Natural persons subject to unlimited tax liability and resident abroad pursuant to DTA are directly affected by the new regulation.
• Unlimited tax liability is met if the domicile (meaning an accommodation occupied under circumstances indicating that the accommodation will be kept or used) or the habitual abode (meaning an abode indicating that one is residing in this place not only temporarily) is in Austria.
• The criterion of residence is met for all those having close personal or economic relations abroad (subsidiary the characteristics of habitual abode or citizenship are relevant).

What does this mean in practice?

Consequently by application of the domestic exemption with progression a higher Austrian income tax burden is expected for the tax year 2023. Furthermore, natural persons subject to unlimited tax liability in Austrian resident abroad must submit a mandatory income tax return in Austria if the income allocated to the other state for taxation (including income subject to the exemption with progression) exceeds an amount of EUR 730.

Practical tips: Documents to keep ready

The taxpayers directly affected by the new administrative practice are encouraged to keep ready a comprehensive documentation of all income allocated to foreign states. This does not only concern types of income subject to standard income tax (e.g. income from employment or income from rentals and lettings) but also types of income subject to a special tax rate (e.g. income from capital assets).

Excursus: Regulation on secondary residence as lifeline?

It is worth mentioning that foreign-resident taxpayers, who for lack of domicile or habitual abode are subject to limited tax liability in Austria, do not lie within the scope of the domestic exemption with progression.

In this context the until now neglected regulation on secondary domicile gains importance, since based on this regulation taxpayers – despite having a domicile in Austria –  are only subject to limited tax liability. The requirements of the regulation on secondary domicile which must be met are:

• the centre of vital interests is located abroad since more than five calendar years AND
• the domestic accommodation is not used for more than 70 days in the calendar year (register must be kept!)

It is noteworthy that the regulation on secondary domicile (and therefore being subject to limited tax liability) is already affirmed as of the following year if it is clear that the residency is transferred abroad permanently or for more than five years.