The new regulation applies to the taxation of income in Austria if you have residence in Austria AND abroad!
Before the 1st of January, 2023, it only had to be determined whether a person was “resident” for tax purposes in Austria or not. If someone was resident in Austria, their entire income earned from all activities worldwide had to be declared in the Austrian tax return. Depending on the double taxation agreement (tax treaty), double taxation of income from different countries was avoided using either the imputation method or the exemption method. With the exemption method, the entire world income was declared in Austria, but used only to calculate of the tax rate that was applied to the Austrian income. This procedure is referred to as “the progression clause”.
Example 1
A German citizen is employed in Germany and rents out an apartment in Austria. He has a year-round secondary residence in that house in Austria as well as a residence in Germany. Under tax treaty, he is considered to be a resident in Austria.
Previously, in Austria, German income also had to be taken into account when calculating the Austrian tax rate. However, the Austrian income was not taken into account in Germany.
New regulation from 2023
The following applies since 1st of January, 2023: The same German citizen not only has to declare his German income in Austria, but his Austrian income is also included in Germany. This means that the tax rate in Germany increases. However, the need to declare his foreign income in Austria can be avoided through the Second Residence Ordinance.
Second Residence Ordinance
The Second Residence Ordinance offers an opportunity to counteract the progression clause. If the Austrian second residence is used for less than 70 days a year and the centre of vital interest has been abroad for at least five years (which must be proven), you can be considered to be limited tax liable in Austria. This means that only domestic income is taxed in Austria, without the progression clause being applied to the entire world income.
For a better understanding, we would like to give you a more detailed example.
Example 2
A Dutch entrepreneur rents an apartment in Austria and has a residence in both countries.
- Tax consequences if the Second Residence Ordinance is NOT applicable: Rental income from the Austrian apartment is taxable and declarable in Austria. Due to the place of residence, the Dutch entrepreneur has unlimited tax liability in Austria and, according to the new legal situation, must declare the Dutch income in Austria as income under the progression clause. This increases the tax rate in Austria. In the Netherlands, Austrian rental income must also be reported as income under the progression clause.
- Tax consequences if the Second Residence Ordinance applies: If the above-mentioned requirements of the Second Residence Ordinance are met, the Dutch entrepreneur has limited tax liability in Austria. The rental income generated is taxable in Austria. If tax liability is limited, an additional amount of EUR 10,486 must be added to the income (additional amount from the 2024 tax assessment, a fix rate). In this case, the Dutch income is not to be declared as income under the progression clause in Austria.
In the Netherlands, however, Austrian rental income must be reported as income under the progression clause.
If the tax liability is limited, the small business exemption in the VAT is not applicable, because the place from which the entrepreneur operates her business is the Netherlands. In this case, all rental sales are subject to VAT.
However, this will change from 1st of January, 2025 onwards. The small business exemption in the VAT will be extended to foreign entrepreneurs who provide taxable services outside their member state within the EU. Both the national thresholds and the EU-wide threshold of EUR 100,000 must be taken into account.
Issued: 29th April, 2024