After many weeks of negotiation, the Austrian government, led by a left-right coalition, finally agreed on a tax reform. It is expected that the major changes will be implemented with an effective date of January 1, 2016. The main goal of the current tax reform is to lower the tax bracket for the middle class. The tax effects are expected to affect more than 6 Million taxpayers and to amount to over € 5 Billion in 2016, when the new tax law shall become effective. The Austrian tax reform is mainly adapted for people in the lowest taxable income bracket: incomes of € 11,000 and up to € 18,000 per year which will be subject to a 25% tax deduction, down from the current 36.5%. Due to a flatter progression, lower and middle income levels will experience a stronger relative decline in tax burdens. On an average families with two children are expected to receive a tax refund of around € 1,580 a year. The top tax bracket of the income tax, on the other hand, the so-called “ceiling rate”, will increase to 55% for those who earn more than € 1 Million per year, whereas the current threshold for the ceiling rate is an annual income of € 60,000. The current ceiling rate of 50% shall still be applicable to an annual taxable income of € 90,000 up to € 1 Million. The new ceiling rate of 55%, for the time being, will apply for five years. However, tax rates on non-wage income at these levels will remain unchanged. Retirees will receive an annual tax credit of up to € 100 if they receive an income of less than € 1,100 per month. Tax credits for children are to be increased to € 440 per child.

The Austrian government plans to finance the reform by fighting tax evasion, closing tax loopholes and raising some tax brackets in the application of the turnover tax. The intended measures include the introduction of mandatory cash registers, a central register of bank accounts and the ease of the bank secrecy in the course of tax audits of businesses. Additional savings shall be made by reducing some tax write-offs and increasing higher taxes on capital gains such as stocks and real estate. Including purchased goods and services in recreation area (eg hotels), the transportation business (eg taxis) or in the cultural business (eg movie or museum tickets) will be switched to a higher tax bracket. Such goods and services will be charged with 13% VAT in the future, which constitutes an increase from the currently levied tax of 10%.

In addition, taxes withheld on capital income (Kapitalertragssteuer, KESt) will be raised from 25% to 27.5%. Although this is unclear at the moment, it is to be expected that the increase is to affect other forms of capital income as well. Thus, the same increase is expected to apply to dividends and similar capital income realized on the sale of shares, income from the provision of capital, profit from derivatives and distributions from private foundations. However, no changes will be made for the withholding tax on savings interest which remains at 25%. The increase of the withholding tax means that the total tax burden on distributed profits from corporations (after deduction of the corporate tax of 25%) is raised from the current rate of 43.75% to 45.625%. This increase may also affect company shareholders. The rate of income tax on the sale of real estate is raised from the current rate of 25% to 30%. However, the sale of primary residences will continue to be exempt from taxation.

In the future, the tax on the sale of real estate is to be calculated based on market value even if such property is transferred between family members. Consequently, although there will be no new gift or inheritance tax, this could constitute a hidden introduction of an inheritance tax for real estate transfers within families.

Old Tax Model

Under the current tax regime there are four assessment bands to be considered:

• 0 to € 11,000:                0%
• € 11,000 to € 25,000:    36.5%
• € 25,000 to € 60,000:    43.2%
• from € 60,000:               50%

New Tax Model

The Austrian tax reform will establish seven income bands organized as follows:

• 0 to € 11,000:                0%
• € 11,000 to € 18,000:    25%
• € 18,000 to € 31,000:    35%
• € 31,000 to € 60,000:    42%
• € 60,000 to € 90,000:    48%
• € 90,000 to € 1 Million:  50%
• From € 1 Million:            55%