1 Taxation of pension provision in Austria Taxation laws on old-age arrangements differ greatly in the individual EU member states. In Austria a three pillars old-age pension scheme is to be found, although it is often claimed that two of them are not more than torsos. Even the first pillar, the statutory pension is at risk to collapse in Austria. 1 With the (private) business pension act (1990) a main step to promote business pension provision has been done; and since the Austrian tax reform 2000 there are some tax incentives for private pension provision. 2 1. Statutory pension insurance In Austria statutory pension provision has a long tradition and is dominated by the idea of compulsory insurance. 3 The statutory pension is financed from current contributions. Taxation of the (compulsory) 4 statutory pension insurance follows the EETconception 5 : Contributions to the statutory pension insurance by the employer are not part of the taxable earnings of the employee. The employer can treat these contributions as a deduction in calculating profits for his own tax purposes. Contributions to the statutory pension insurance by the employer are deductible business expenses; they are caused by his trade or business. 6 Contributions to the statutory pension insurance by the employee are expenses for the production of income; these contributions are regarded as an expense of employment. 7 Pensions 1 ) In about 30 years a demographic pension-gap threatens. 2 ) Individuals who have their residence or their habitual place of abode within Austria are subject to unlimited (individual income) tax liability. Unlimited (individual income) tax liability includes all income from domestic and foreign sources 1 par 2 Individual Income Tax Act (IITA). In principle employees and pensioners pay wage tax, self-employed persons pay income tax, whereby wage tax and income tax differ only in the method by which they are levied. The tax rate is fundamentally the same. For Tips for wage Tax Payers see the Austrian Tax Book 2000, federal ministry of finance. 3 ) The compulsory membership arises by taking up gainful employment. 4 ) To the higher value insurance and voluntary prolonged insurance within the statutory pension insurance see 3. 5 ) Abbreviations: E (exempt); T (fully taxable). 6 ) 4 par 4 IITA. 7 ) 16 par 1 No 4 IITA.
2 from the statutory (security social) insurance are fully taxable; 8 they are income from employment. 9 This includes pensions from pension insurance institutions for workers as well as employees, farmers and commerce. 2. Business pension provision Up to now business (company) pension provisions are not wide-spread in Austria. Only 10 12 % of the Austrian employees can expect business pensions from pension funds; 10 Austria finds itself in the last third of all EU members states. Contributions fixed by a contract to pension funds in the meaning of the pension fund act or contributions to hardship and other relief funds of a trade or business can the employer treat as a deduction in calculating profits for the employer s own tax purposes; these contributions by the employer are deductible business expenses. 11 Contributions of the employer, which shall not constitute income from employment are contributions by the employer for his employee to pension funds within the meaning of the pension fund act, to foreign pensionfunds caused by a foreign legal obligation, to hardship relief funds or to incorporated foundations. 12 Contributions by the employer in favour of his employees to pension funds remain therefore tax free; this only applies to contributions to foreign pension funds if there is a legal obligation thereto. The future pension deriving from these employer contributions are fully liable to tax: Emoluments and (other) advantages derived from domestic or foreign 13 pension funds are income from employment; this is valid for distributions from incorporated foundations 14 as well as emoluments and (other) advantages derived from hardship relief funds. 15 Employers (taxpayers) computing profit by balance sheet accounting, may set up 8 ) To the higher value insurance within the statutory pension insurance see 3. 9 ) 25 par 1 No 3. 10 ) Benisch, Trend 11/99, 214. 11 ) 4 par 4 No 2 IITA but only contributions for the employees; contributions by the employer for himself are not deductible business expenses. 12 ) 26 No 7 IITA also amounts paid by the employer as cost recharges for pension obligations of a prior employer or as refunds in the meaning of Sec 14 par 9 and amounts paid under similar statutory provisions for the transfer of qualifying periods or payment obligations to an Austrian successor, except an insurance enterprise, who assumes such liabilities. 13 ) If there is a foreign legal obligation to contribute to pension funds. 14 ) In the sense of 4 par 11 as long as they can be classified as emoluments or (other) advantages from a present (existing) or past employment. 15 ) 25 par 1 No 2 IITA.
3 pension provisions for legally binding and irrevocable pension commitments made in writing and for direct pension commitments in the form of annuities in the meaning of the pension fund act; for the dotation the following shall be required: 16 The pension provision shall be set up in accordance with the accepted rules of actuarial theory (No 1); the promised pension must not exceed 80 % of the last recurrent salary. From this maximum amount, promised payments by a pension fund shall be deducted in as far as the contributions to the fund have not been made by the beneficiary (No 5) and pension provision shall be covered by securities (No 7) at the end of each financial year, securities shall be held as assets with a face value of at least 50 % of the amount which has been shown in the balance sheet as a reserve at the end of the previous financial year; if the coverage by securities, at any time during the year, amounts to less than 50 % of the respective provision, profit shall be increased by 60 % of the default in securities coverage. 3. Special expenses (private pension provision) If an employee is entitled to contribute to a future pension, the main question for tax purposes is whether the contributor is entitled to any tax relief on the contribution. The income tax act enumerates specific private expenses (special allowances) which enjoy tax relief. 17 If the expenses listed are simultaneously income related expenses or business expenses then they are deductible as such. Special expenses are deductible either in unlimited extend or in limited extend. Special expenses are for example: Contributions towards pension saving schemes (within the maximum permissible amount) Voluntarily prolonged insurance within the statutory pension insurance and delayed purchase of insurance cover periods, eg, of school-time (in unlimited extend) Special expenses, which are only deductible within the framework of the joint maximum amount, are deductible to a personal maximum amount of 40.000 ATS pa. For sole earners and single parents this maximum amount is raised to 80.000 ATS. 16 ) 14 par 7 IITA. 17 ) 18 IITA.
4 As from three children this maximum amount is further increased by 20.000 ATS to 60.000 ATS or 100.000 ATS. Special expenses within the maximum amount are only applicable to one-quarter for tax purposes ( special expense quarter ). 18 So higher value insurance within the statutory pension insurance and contributions undertaken by the employee to an Austrian pension fund or, without legal obligation, to a foreign pension fund are deductible within the joint maximum amount as special expenses. 19 The pension deriving from these contributions is only taxable to onequarter. 20 To make a brief summary, pensions from the statutory security social insurance are fully taxable (EET-conception); augmentations deriving from voluntary additional insurance are only taxable to one-quarter of their value (contributions reduced, payment reduced). Contributions which the employer makes for his employees to pension funds remain tax free, the future pensions deriving from these employerraised contributions are fully liable to tax. Contributions which the employee makes to pension funds are only applicable to one-quarter for tax purposes, the future pension deriving from these employee contributions will only be taxable to one-quarter. Contributions to foreign pension funds remain tax free, if there is a legal obligation thereto: Emoluments and (other) advantages derived from foreign pension funds are fully taxable; only 25 % of those parts of such emoluments and (other) advantages shall be taxable if there is no foreign obligation to contribute to pension funds. For the drawers of pension a pensioner tax credit (5.500 ATS) is granted; 21 it is automatically observed by the department paying the pension. Simultaneous allowance of the pension tax credit and the transportation and employee tax credit is not possible. How are several pensions taxed? 22 To prevent payment in arrears and in advance for the receipt of more than one statutory pension or pension for federal 18 ) Even if you do not have any special expenses a lump sum of 819 ATS for special expenses is automatically deducted annually from your current wage tax account. The amount spent within the maximum amount is quartered and reduced by the lump sum special expense of 819 ATS pa. Pooled special expenses are therefore only effective if they are higher than 3.276 ATS. Moreover there is a income-related reduction for these special expenses; from a total income level of 700.000 ATS they cannot be applied. Between 500.000 ATS and 700.000 ATS the deductible amount is reduced proportionally. 19 ) If you claim a provident premium as form 2000 (see 4.) you cannot at the same time deduct special expenses. 20 ) 25 par 1 No 2 IITA. 21 ) 33 par 6 IITA. 22 ) Austrian Tax Book 2000, 59.
5 employees there is an obligation to undertake joint taxation. If somebody, for instance, obtains a federal pension and a widow s pension from the pension insurance body for employees the wage tax from both earnings is held back from the higher pension. If in addition to your national (ASVG) pension you receive a company pension there is no obligation for joint taxation. In these cases the former employer may pay the tax on his national (ASVG) pension (however, he cannot be obliged to do so). 4. Preferential-bonus provident pension 23 In the Tax Reform 2000 scheme measures have been created for the first time for a provident pension with preferential-bonus. It is similar in conception to building society savings and can be utilised for the following contributions: additional pension insurance with an insurance institution employee contributions for a pension fund savings in a pension investment fund (PIF) voluntary additional insurance within the statutory pension insurance The bonus depends on the secondary market yield. In the year 2000 it stands at 3.5% of the contributions. Favourable treatment is accorded to a maximum amount of 1,000 euro (13,760.30 ATS), so that the annual bonus for 2000 comes up to 481.61 ATS. Within this maximum amount the bonus can be applied to two or more provident measures (denomination possible). In order to obtain the bonus you have to apply for it with a declaration of payment; it is available from the relevant contractual partner (for a pension investment fund this is the depository banking institution). If there are several contracts you should ensure that your bonus application is only claimed for the maximum tax base of 1,000 euro. The bonus is granted for the year in which the contribution has been paid. Contributions paid in advance from the15 th December are acknowledged for the following year. Payment in arrears, on the other hand, is not possible. The returns deriving from preferentialbonus contributions are tax free. Example: A person liable to taxes pays 1,500 euro into a PIF every year. The bonus is granted 23 ) Federal ministry of finance, Austrian Tax Book 2000, 47.
6 for 1,000 euro. The total assets are transferred as a one-time premium into an additional pension insurance. Dividends devolving from the 1,000 euro provident contributions are tax free. Dividend payments for the remaining 500 euro are liable to tax. Contributions to the additional pension insurance and for the purchase of shares in investment funds are not recognised as special expenses. For contributions to voluntary increased insurance in the statutory pension insurance and for employee contributions to pension funds, on the other hand, there is the possibility of opting either for bonus or for special expenses.