Financial Reserves of Clubs
When accumulating reserves or engaging in asset formation, such privileged organizations must therefore observe specific requirements and constraints.
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Non-profit and charitable associations in Austria benefit from specific tax privileges, as under certain conditions their income and revenues are not subject to either corporate income tax or value added tax (VAT). Furthermore, privileged associations must not pursue an intention to generate profits in the course of their activities. Any profits that may nevertheless arise (so-called incidental profits) must be used promptly for the organization’s tax-privileged purposes. However, it is not detrimental to their privileged status if the association does not use all its income within the same calendar year.
According to a decree issued by the Federal Ministry of Finance, the holding of a financial reserve amounting to an average annual requirement of necessary funds (working capital) may still be considered permissible. Any accumulation of funds exceeding this threshold, however, requires proper documentation demonstrating the specific objectives for which the funds are being accumulated and the timeframe within which these projects are to be implemented. This documentation must be evidenced by an appropriate resolution of the management board or the members’ assembly. Otherwise, the accumulation of an inadequately high level of assets may lead to the loss of the association’s tax-privileged status.
Capital gains tax (KESt) exemption declaration for non-profit associations
Associations may avoid the deduction of capital gains tax (Kapitalertragsteuer – KESt) on interest income and dividends by submitting a business-related, digital KESt exemption declaration to their bank. This exemption applies exclusively to capital assets that form part of the necessary business assets; it does not apply to the association’s core (ideational) area (e.g. membership fees or donations).
In the case of associations, business assets may, for example, exist within an indispensable auxiliary activity (“unentbehrlicher Hilfsbetrieb”, also referred to as a purpose-realization operation, e.g. concert performances of a non-profit choir).
Such an indispensable auxiliary activity exists if the following conditions are met:
- The activity must, in its overall orientation, be directed towards fulfilling the non-profit, charitable, or ecclesiastical purposes.
- These purposes cannot be achieved in any other way than through this indispensable auxiliary activity.
- The auxiliary activity must not compete with taxable commercial operations of the same or a similar nature to a greater extent than is unavoidable for fulfilling the purposes.
If such an indispensable auxiliary activity is present, the association’s tax privileges remain fully intact, and the auxiliary activity itself is also exempt from taxation. This implies that capital income generated by a privileged association within the scope of its indispensable auxiliary activity is likewise tax-exempt.
Practical note
By submitting the KESt exemption declaration to the bank, the association achieves a final tax exemption of its capital income. A key prerequisite is that the capital assets can be clearly allocated to the indispensable auxiliary activity. It is therefore recommended to maintain a strict separation of bank accounts and securities accounts between the association’s core (ideational) area and its operational (business) area.