Real Estate Income Tax Liability in the Event of Rezoning

The Austrian Administrative Supreme Court (Verwaltungsgerichtshof, VwGH) recently addressed the question of whether there is an economic connection between the rezoning of a property and its disposal, which is relevant for determining the applicable tax treatment. In the case at hand, the taxpayer sold a property in July 2017 that he had acquired in 1998 and taxed the resulting income using the lump-sum method, resulting in the lower effective real estate income tax (ImmoESt) rate of 4.2%.

The tax authority took a different view: Since the property was rezoned as building land only a few months after the sale, it argued that the higher effective ImmoESt rate of 18% applicable as a result of the rezoning should apply.

Legal Framework

In the case of properties qualifying as “legacy assets” (Altvermögen), acquisition costs are determined on a lump-sum basis at 86% of the sale proceeds. Accordingly, the taxable capital gain amounts to 14% of the sale proceeds, resulting in an effective tax burden of 4.2% (14% multiplied by the 30% ImmoESt rate).

If, after 31 December 1987 and after the most recent acquisition for consideration, the zoning classification of the property was changed from agricultural or other non-building land to building land, the acquisition costs are determined on a lump-sum basis at 40% rather than 86% of the sale proceeds. Consequently, the taxable capital gain amounts to 60% of the sale proceeds.

This results in an effective tax burden of 18% of the sale proceeds (60% multiplied by the 30% ImmoESt rate). This treatment also applies to rezoning that is economically connected with the disposal if the rezoning takes place within five years after the disposal, as well as to an increase in the purchase price resulting from subsequent rezoning.

Decisions of the Federal Fiscal Court and the Administrative Supreme Court

The Austrian Federal Fiscal Court (Bundesfinanzgericht, BFG) found that the rezoning did not actually become effective until six months after the sale and therefore applied the more favourable ImmoESt treatment. However, it did not examine whether there was an economic connection between the subsequent rezoning, which in any event occurred within the five-year period, and the sale.

The Austrian Administrative Supreme Court (VwGH) overturned the BFG’s decision and ruled in favour of the tax authority. Its key argument was that, where rezoning takes place within the five-year period, it must always be examined whether there is an economic connection between the rezoning and the disposal. Such an economic connection exists, in particular, where the seller benefits economically from the increase in value resulting from the rezoning, for example in the form of a purchase price exceeding the value of the property based on its previous non-building land designation.