Tax recognition of retroactive legal transactions

A construction company concluded a "company agreement" with a trade union representative, which granted employees a tax-free daily allowance of €2.20 per hour from the third hour worked. However, at the time the company agreement was concluded in 2017, the company did not have a works council, which would have been necessary. For this reason, the tax office decided during a subsequent audit that the company agreement had not been validly concluded.

In September 2022, a works council was established, which subsequently approved the 2017 agreement. The construction company therefore appealed against the tax office's decisions, arguing that the daily allowances should remain tax-free due to the retroactive approval by the works council.
 

Background

A company agreement is a written agreement between the company owner and the works council. Such an agreement governs certain wage-related provisions, such as the payment of daily allowances in this case.
In civil law, there is the possibility of retroactive approval of legal transactions that require approval, if the competent body was not established at the time the agreement was concluded, but this body subsequently confirms the agreement.

Decision of the Federal Tax Court (Bundesfinanzgericht - BFG)

The Federal Tax Court ruled that a works council is required for the conclusion of a works agreement. Without the competent body (works council), no valid company agreement can be concluded and the daily allowances paid cannot be treated as tax-free. Consequently, the payments in question must be taxed subsequently.

The company agreement in the present case is to be regarded as a legal transaction subject to approval, which the works council has given retroactive effect under civil law. However, the Federal Tax Court argues that this provision does not apply in tax law. Tax law is based on the actual economic circumstances at the time the tax liability arises. The tax liability arises with the realisation of the tax liability and cannot be eliminated by subsequent private-law agreements. This is also true in the reverse case, since a (retroactive) tax liability cannot be established by relating an event back to earlier periods. Since the original agreement was not a company agreement within the meaning of the Austrian Worker Protection Act (ArbeitnehmerInnenschutzgesetz - ArbVG), the subsequent approval by the (newly established) works council in 2022 does not have any retroactive tax effect and does not lead to a waiver of the tax liability. The daily allowance was therefore to be treated as taxable.