Tax liability

to consider when moving to Austria

Tax liability

As a country, Austria enjoys an excellent international reputation in terms of quality of life. However, moving to the Alpine republic can also quickly lead to unwanted tax consequences. Why profound tax law advice in advance helps to avoid unpleasant surprises. 

A person is subject to unlimited tax liability in Austria if they have their residence or habitual abode in Austria. Residence means having an apartment in Austria that you can dispose of at any time. If it is impossible to clearly determine whether someone has a residence in Austria, their habitual abode in Austria can be viewed as a substitute. This is the place where the person indicates that they are not just staying on a temporary basis. A person with unlimited tax liability in Austria is, in principle, subject to Austrian taxes on their ‘global income’ (principle of universality). The tax requirements placed on everyone else are limited to their Austrian income (territoriality principle). As a result, under certain circumstances, even having a flat in Austria could trigger unlimited tax liability in Austria, in principle. 

Exception under the Second Residence Ordinance 

However, for individuals who can prove that they have only been in Austria for a short period of time, there is an exception under the Second Residence Ordinance (Zweitwohnsitzverordnung, ZWVO). No unlimited tax liability arises, despite residence in Austria, if the person (i) has had the centre of their vital interests abroad in the last 5 calendar years prior to establishing their residence and (ii) does spend more than 70 days in a calendar year within Austria. However, there is a counter-exception to this exception: if a person uses the residence of their (spousal) partner who is already subject to unlimited taxation (in Austria), and the person in question does not permanently live separate from their partner, the use of this residence would trigger unlimited tax liability in Austria. 

Double domicile and double taxation agreements 

If a person now has several residences, this generally results in the person being resident in several states for tax purposes. This could lead to the individual’s income being subjected to double taxation, but this double taxation is generally undesirable. For this reason, Austria has concluded its own double taxation agreements (DTAs) with numerous countries. A DTA assigns the right of taxation for certain types of income to the contracting states in question. A distinction is made between the ‘state of residence’ and the ‘other state’. The respective DTA determines which state is to be considered the state of residence. The process of examination usually takes place in stages, as the example of the Austria – Russia DTA shows: 

  • The person is resident in the state in which they have their permanent residence. 
  • If the person has a place of residence in both states, they are deemed to be resident in the state with which they have closer personal and economic ties (centre of vital interests). 
  • If the centre of vital interests cannot be determined or if the person does not have a permanent home in any contracting state, they shall be considered a resident of the state in which they have their habitual residence. 
  • If the person has their habitual residence in both states or in neither state, they shall be deemed to be resident in the state of which they are a national. 
  • If the person is a national of both states or of neither state, the authorities of the contracting states shall endeavour to settle the question by mutual agreement. 

Once the ‘state of residence’ has been determined, it is then necessary to examine what specific income the person has earned (e.g., dividends from foreign companies, income from letting apartments, remuneration for various functions in governing bodies, etc.). The applicable DTA contains concrete norms for allocating most types of income. 

An example: a natural person resident in Austria holds shares in a Polish joint stock company and receives an annual dividend in return. Since the Austria – Poland DTA regulates the right of taxation of dividends in article 10, the following applies accordingly. Step one: in principle, Austria should tax the dividend; step 2: however, Poland may tax 15% of the gross amount of the dividend; step 3: Austria does not lose the right of taxation, but credits the Polish withholding tax to the Austrian tax (credit method). 

Obligation to register triggered by moving? 

Since July 2020, service providers such as lawyers or tax consultants (intermediaries) have been obliged to inform the domestic tax authorities of cross-border arrangements that may lead to tax avoidance. If the intermediaries are subject to a professional duty of confidentiality, the taxpayer must report the cross-border arrangement to the tax authorities, unless the taxpayer releases the intermediaries from their duty of confidentiality. 

Moving to Austria can also be a cross-border arrangement of this nature. From a tax law perspective, this instance would involve the assets of the recipient being revalued at the current market value (‘step-up in basis’). In some circumstances, the individual could then sell the assets at their current market value in a tax-efficient manner because they would not receive taxable income from the sale (the step-up in basis means that the assets are revalued at market value and no gain is realised on a sale at market value). As a result, this would mean that the person could ‘take’ the hidden reserves on their assets to Austria without paying any tax. Whether or not this option is available also depends on the tax law of the country of departure. The key question is whether this state is home to an exit tax. If this kind of tax were applicable in the event of departure, there would be no risk of tax avoidance. 

Conclusion 

  • Even having a flat can lead to unlimited tax liability in Austria, in principle. 
  • If the apartment is only used very infrequently (< 70 days/year) and the taxpayer has been living abroad for at least 5 years, they can only be subjected to limited tax liability due to the ZWVO, despite their Austrian residence. 
  • If the taxpayer has a dual domicile, the state of residence must be verified under the applicable DTA. 
  • Depending on the type of income, the state of residence or the ‘other state’ may tax the specific income. The DTA also regulates how the state of residence avoids double taxation, namely by the exemption method (the state of residence does not tax the actual income at all) or the credit method (the state of residence credits the foreign tax). In most cases, DTAs provide for both methods. 
  • Moving to Austria may also give rise to reporting obligations. In Austria, the taxpayer’s assets will be revalued at market value (‘step-up in basis’), especially if the exit state does not have an exit tax. If this is the case, there is probably a notifiable cross-border arrangement. 

This article is based on the status of the law as of 22 October 2020 and is only intended to provide a rough overview of the possible tax issues associated with moving to Austria. As not all tax law topics related to moving to Austria are dealt with in this article, it does not claim to be complete. The team of experts at LGP would be happy to provide you with an individual assessment of your specific case at any time. 

Author:

Mag. DANIEL KOCAB, LL.M., Attorney-at-law at LANSKY, GANZGER + partner

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