As of 1 March 2014, a restriction on the deductibility of manager remunerations for tax purposes exceeding EUR 500,000 per person and year was introduced in Austria. Any remuneration exceeding that threshold cannot be deducted for tax purposes on the level of the employer company. This restriction was subject to substantive discussions in media and legal literature, with some experts arguing that the provisions may be unconstitutional. The Federal Tax Court (Bundesfinanzgericht) filed a petition to the Constitutional Court to suspend these provisions as unconstitutional, arguing that the non-deductibility of annual manager remunerations infringes the constitutionally guaranteed right of equality (Gleichheitsgrundsatz). However, in a ruling published 14 January 2015, the Constitutional Court upheld the provisions and decided that the non-deductibility is in line with Austrian Constitutional Law.
Non-Deductibility of Annual Remunerations of Managers above EUR 500,000
The Tax Amendment Act 2014 (Federal Gazette I 13/2014) introduced a restriction on the tax-deductibility of expenses in the form of remunerations exceeding an amount of EUR 500,000. As a result, neither individuals nor corporations are in a position to deduct remuneration paid to employees exceeding such threshold for tax purposes. The provisions generally pertain only to those individuals who are providing services to the employer as employees or are comparably integrated in the organization of such employer. In addition, special provisions as regards the non-deductibility of severance allowances have been introduced in parallel.
According to the Austrian legislature, the purpose of these restrictions is to tackle the increasing gap between low-income earners and high-income earners, which is a goal that is in the public interest. In Austria approximately, around 1,000 persons are estimated to have received remuneration for services of above EUR 500,000 in 2012.
Since its introduction, the restriction has been subject to heated discussions and criticism in the general media and in legal literature. Critics argue that the restriction infringes basic principles of income tax law, including the ability-to-pay principle (Leistungsfähigkeitsprinzip) and the objective net income principle (objektives Nettoprinzip) and that it may therefore be unconstitutional.
Arguments by the Federal Tax Court and Decision by the Austrian Constitutional Court
The Federal Tax Court inter alia argued in its petition that the non-deductibility infringes the constitutionally guaranteed right of equality (Gleichheitsgrundsatz): first, by not providing sufficient transitory provisions, thereby violating the concept of legitimate expectation (Vertrauensschutz); and second, by not being objectively justifiable, thereby violating the principle of objectivity (Sachlichkeitsgebot). The Constitutional Court, however, upheld the provisions and decided that the non-deductibility does not infringe the constitutional right of equality.
The Constitutional Court in particular argued that the legislature is allowed to influence the behavior of taxpayers by restricting the deductibility of remunerations payable to high-income earners in order to tackle the increasing gap between low-income earners and high-income earners. Such goal lies in the public interest and may therefore justify an infringement of the objective net income principle. In addition, the Court did not find that the restriction is an inappropriate means to achieving such goal.
As a result of this decision, the restriction on the deductibility of manager remuneration exceeding an amount of EUR 500,000 per person and year stays in place, thereby increasing the senior management-related tax costs of Austrian employer companies.