Progression Clause: Foreign Income Also Counts

The Austrian Federal Fiscal Court (BFG) recently had to decide whether foreign rental income must be taken into account when determining the Austrian income tax rate of a person resident in Germany who is treated as having unlimited tax liability in Austria solely as a result of exercising an option to do so.

The German citizen was resident in Germany and had neither a domicile nor a habitual abode in Austria. He was therefore only subject to limited tax liability in Austria. In 2023, he earned employment income in Austria and rental income from a property located in Germany.

For the 2023 tax year, the taxpayer applied to be treated as subject to unlimited tax liability in Austria. As a result, the Austrian tax authorities considered the German rental income when determining the Austrian income tax rate under the progression clause (Progressionsvorbehalt). This increased the Austrian income tax rate applied to his Austrian employment income.

The taxpayer challenged this approach, arguing that the rental income had already been taxed in Germany.

BFG: Worldwide Income Is Decisive

According to the BFG, the progression clause must be calculated on the basis of the taxpayer's worldwide income. As a consequence, the income tax rate applicable to the taxpayer’s Austrian-source income is increased. However, the foreign income itself is not taxed again in Austria.

The BFG's view that, upon exercising the option for unlimited tax liability, the progression clause must be applied on the basis of worldwide income prevents taxpayers who are, in principle, only subject to limited tax liability but opt for unlimited tax liability from being placed in a more favourable position than individuals who are genuinely subject to unlimited tax liability in Austria.

However, a final clarification of this disputed legal issue by the Austrian Supreme Administrative Court (VwGH) is still pending.