Tax liability: Progression proviso also applicable in the source state

One of the ways in which international double taxation is avoided is by exempting certain (foreign) income from taxation in Austria. As a rule, the exemption method provides for the exempt income to be taken into account when calculating the tax rate to be applied to the remaining income. There was uncertainty as to whether Austria may also introduce a progression proviso as a source state. The ruling of the Administrative Court brings clarity.

VwGH ruling allows progression to be retained

According to the decision of the VwGH Ra 2021/13/0067 DTA Turkey of 07.09.2022, the source state (state from which the taxable income originates) may in principle also apply the progression proviso. The VwGH ruled in the case of a taxpayer who had a residence in both Austria and Turkey, whereby the center of her life interests was located in Turkey. Accordingly, Austria, as the source state, is entitled to take income earned in other countries into account for tax purposes subject to progression. In the opinion of the VwGH, this decision was not precluded by the DTA Austria-Turkey.

The reason given was that, in the case of unlimited tax liability in Austria, the progression proviso already results in principle from domestic law and does not require further approval by the DTA. The Administrative Court also referred to the principle of equal taxation, which states that tax laws should be applied and enforced equally and therefore all taxpayers should be treated equally. Previously, foreign income was not subject to progression if the tax residence was not in Austria.

Familiarization with the income tax guidelines

As a result of the above-mentioned ruling, the tax authorities have now incorporated the new ruling into the income tax guidelines. As a result, the following applies from the 2023 assessment year for taxpayers who have unlimited tax liability in Austria but are resident for tax purposes in another country: Foreign income must be declared in the Austrian tax return subject to progression.

This consequently increases the tax assessment basis for determining the tax rate applicable to the income subject to tax in Austria. The tax burden will increase for the group of persons concerned in Austria and the number of mandatory assessments will also increase. A person is subject to unlimited tax liability if they have their domicile or habitual residence in Austria.

Important notes

For persons with unlimited tax liability in Austria, it is particularly important to keep the relevant documents on foreign income available in full. It should also be noted that this regulation applies to all types of income covered by the Income Tax Act.

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