From 1/03/2014, the disallowance for the part of wages exceeding €500,000 in Austria has come into force. This includes payments for work and services performed if these exceed €500,000 per person per financial year. With this prohibition the legislator wished to counteract the increasing growth in the wage differential gap in the payment of income.
This regulation was considered questionable in terms of constitutional law and was the subject of complaints by the affected companies. As individual applications had initially been rejected for formal reasons, the Austrian Constitutional Court (VfGH) has now ruled on this subject after the Austrian Federal Fiscal Court (BFG) had requested an examination of the law. The result is that the objections to the contested regulation of the law on income and/or corporation tax are unfounded.
As a result, from 1/03/2014, higher salaries (for these purposes, payment in kind is to be included) are to be absorbed within the framework of effective tax reconciliation and are not tax deductible. The prohibition of deduction does not affect employer’s non-wage costs (employer’s contribution (DB), employer’s supplementary charge (DZ) and municipal tax). For payees, payment of salary is subject to full taxation of 50%. The decision does not affect the deductibility of legal severance payments, even if the severance is more than 500,000 €.
The limitation of deductibility makes payment of salaries of more than 500,000 € very unattractive from a tax point of view, especially for companies in which the affected managers also have shares. For these companies in particular, it should be considered that – at least for amounts of more than 500,000 € – instead of payment of salary, dividend distributions should be made, which would be subject to Capital Gains tax (KESt) at a mere 25%.
If the affected managers’ firms are still subject to the regime of the “old version of settlement on dismissal”, before the changeover to higher dividend distributions, additional measures (for example transfers within the group, notice of dismissal pending a change of contract) can be potentially worthwhile options involving termination of the employment status and the payout of a tax-privileged settlement on dismissal on the basis of the higher salary.