The tax-free allowance was introduced as of the 2010 tax assessment. All natural entities with any type of operational income can claim this tax allowance whether they determine their profit by means of statement of revenues and expenditures or balance calculation. Its implementation provided entrepreneurs with compensation equivalent to the tax concession of the 13th and 14th salary of employees.
The tax-free allowance amounts to up to 13% of the profit; it is made up of a basic tax allowance for profits of up to EUR 30,000 and beyond that of an investment-based tax allowance.
Analogous to the solidarity levy on special payments of upper-tier employees, the amount of the investment-based tax allowance is limited from 2013 onwards through scaled percentages:
The tax-free allowance amounts to 13% with an assessment base of up to EUR 175,000. If this amount is exceeded, a tax allowance of 7% is due on the next EUR 175,000; and a tax allowance of 4.5% on an additional EUR 230,000. From an assessment base of EUR 580,000, no tax-free allowance is available.
The percentage scaling results in a maximum amount of EUR 45,350.
Who can claim the tax-free allowance?
- Natural entities that generate revenues from commercial activities (farming and forestry, commercial operation, self-employed work).
- For partnerships (e.g. OG, KG), the partners can claim tax-free allowance in the amount of their share of the profit.
If the share of a partner belongs to the operating assets of a company, the tax-free allowance can be claimed only within the profit assessment of this company, i.e. it is calculated based on the profit of the company including the profit accrued from the partnership.
- If the profit is calculated on the basis of a consolidation into lump sums, the basic tax allowance is automatically deducted. However, the investment-based tax allowance cannot be claimed.
Also in the case of the new lump sum for small business owners as of the 2020 assessment, only the basic tax-free allowance can be claimed.
Here is a detailed explanation of how the tax-free allowance works:
The tax-free allowance is divided into the basic tax-free allowance and the investment-based tax-free allowance.
|Basic tax-free allowance||Investment-based tax-free allowance|
|for the first EUR 30,000 of profit||for shares in the profit of over EUR 30,000|
|no investment is required||The prerequisite is the procurement of physical fixed assets subject to wear and tear or certain securities|
|automatic consideration||verification in the tax return|
Basic tax-free allowance
The basic tax-free allowance of 13% of the profit can be claimed on profits up to EUR 30,000 (maximum of EUR 3,900). An investment is not required.
The basic tax-free allowance can only be claimed once per assessment year even if the taxpayer operates several companies. The basic tax allowance can be freely allocated to the individual companies (subject to a maximum of 13% of the operational profit). If no allocation is made, it is apportioned in the ratio of the profits.
If there are several companies with a positive operating profit, the profits are added together to calculate the basic tax-free allowance. A reduction by virtue of an offset with any operational losses is not effected.
Investment-based tax-free allowance
If the profit is over EUR 30,000, an investment-based tax-free allowance can be claimed in addition to the basic tax-free allowance.
A maximum of 13% of the profit exceeding the amount of EUR 30,000 (basic tax-free allowance), can be left tax-free. The prerequisite for this is that assets for the fixed assets (“fixed assets that are granted tax concessions”) or certain securities are acquired in the same calendar year.
The investment-based tax-free allowance is, on the one hand, limited by the amount of the acquisition or production costs of the fixed assets granted tax concessions; on the other hand, by a maximum of 13% of the profit per taxpayer.
The tax-free allowance is due in addition to the depreciation of fixed assets (Absetzung für Abnutzung, AfA) and does not reduce the assessment base of AfA.
Thus the acquisition costs reduce the taxable profit in two ways: Firstly, the acquisition costs can be deducted via the tax-free allowance in the year of acquisition; secondly, the write-off can be claimed in full.
Fixed assets granted tax concessions
The prerequisite is the acquisition or production of new physical assets subject to wear and tear of the fixed assets with a usual useful life of at least 4 years.
The assets must be ascribable to a domestic company or domestic place of business. The physical presence of the asset in Austria is not mandatory for this; what counts is that it belongs to the company in terms of its function.
Investments in buildings and rental investments are also covered by the tax-free allowance on profit. However, the tax-free allowance is due only at the time of completion with regard to the full amount of production costs. The costs may be taken into account for the investment-related profit amount to the extent that the building is considered to be part of the operating assets.
Fixed assets granted tax concessions also include securities that meet the requirements for the coverage of pension provisions. Again, it is required that the securities be dedicated to the fixed assets for at least 4 years. You can find a list of suitable securities in the information leaflet “Securities for securities coverage of pension provisions”.
On account of the 2014 Law on Tax Modifications (Abgabenänderungsgesetz), only mortgage bonds could still be granted tax concessions as securities for availment of the investment-based tax-free allowance for fiscal years that ended after 30 June 2014. This restriction of securities to property investments was limited until 2016. Consequently, for financial years beginning on or after 1.1.2017, all securities granted tax concessions are again eligible (securities that may also be used to cover personnel provisions in accordance with Section 14 (7) 4 of the Income Tax Act (EStG)).
The tax-free allowance cannot be claimed for:
- cars and utility vehicles with the exception of driving school vehicles and vehicles that serve for commercial passenger transportation,
- minor assets (acquisition or production costs up to max. EUR 800), if they are immediately written off as operational expenditures,
- used assets,
- Assets acquired by a company that is under the dominating influence of the taxpayer as well as
- Assets for which a research award has been made use of.
Assets are used, when at the time of acquisition, they have already undergone a loss of value caused by their use. Demonstration machines (e.g. demonstration motor vehicles) are considered to be used assets. Exhibition items and assets which are in trial operation are to be valued as unused. Similarly, motor vehicles which have been registered for the day are considered to be unused.
Level of granted tax concessions (tax benefit)
As already mentioned, the tax-free allowance amounts to a maximum of 13% of the profit. With regard to profits over EUR 30,000, the amount beyond that must correspond to investments in fixed assets that are granted tax concessions or securities of the same amount and in the same calendar year. In total, the granted tax concessions are limited to EUR 45,350 per taxpayer and year.
A restaurant operation generates a profit of EUR 20,000 in 2020. The entrepreneur has invested EUR 1,000 in equipment in 2020:
Profit before tax-free allowance 20,000
Of which 13% 2,600
Investments in fixed assets granted tax concessions 1,000
Basic tax-free allowance 2,600
Investment-based tax-free allowance 0
Total tax-free allowance 2,600
Final taxable profit 17,400
The tax-free allowance adds up to EUR 2,600, i.e. 13% of the profit, so that tax only has to be paid on EUR 17,400 in 2020. This tax-free allowance would be due even without investment.
A commercial undertaking generates a profit of EUR 50,000 in 2020. The entrepreneur has invested EUR 2,000 in securities granted tax concessions in 2020.
Profit before tax-free allowance 50,000
Of which 13% 6,500 (maximum possible tax benefit)
Investments in securities granted tax concessions 2,000
Basic tax-free allowance (13% of EUR 30,000) 3,900
max. investment-based tax-free allowance 2,000
Total tax-free allowance 5,900 (maximum not exhausted)
Final taxable profit 44,100
The tax-free allowance amounts to EUR 5,900; it is composed of the basic tax-free allowance and the investment-based tax-free allowance covered by investments (EUR 2,000). Hence the taxable profit is reduced by EUR 5,900 in 2020.
If investments are made in years of losses, there is no entitlement to any tax benefit in the form of the tax-free allowance.
Transitional profits (i.e. profits accruing on account of a switch between types of profit calculations) are to be included in the tax benefit.
No tax-free allowance can be deducted from capital gains (profits accruing when a business or partnership share is sold or the operation of the business is terminated).
Claiming the tax benefit
The basic tax-free allowance must be entered on the tax return (form E1a) under item 9221 but is generally automatically granted if this entry is forgotten.
The investment-based tax-free allowance must be disclosed in the tax return of the respective year. The sum of the tax-free allowance, broken down by physical assets and securities granted tax concessions, is to be entered under Items 9227 and 9229. Amendments and corrections are possible until the income tax notification or tax assessment enter into legal force.
Assets serving for the coverage of an investment-based tax-free allowance must be accounted for in a list. For each business, this list must specify to what extent the acquisition or production costs serve for coverage of the tax-free allowance, broken down by physical fixed assets and securities. Listing the tax-free allowances in the asset register or assets analysis next to the corresponding assets suffices.
Securities for which a tax-free allowance is claimed must be entered in a separate list, which must be presented to the fiscal authorities on demand. By entering them in the list, the securities are dedicated to the operational fixed assets.
In case securities are used for the investment-based tax-free allowance and are thus held as operating assets, gains from the sale are in principle subject to the capital gains tax deduction of 27.5% without a final or definitive taxation (“Endbesteuerung”) if they were acquired after 1.4.2012. Prior to the legislative amendment, they were subject to standard taxation.
Tax on the investment-based tax-free allowance must be paid subsequently (profit-increasing disclosure of the previous tax allowance) if, prior to the expiry of the time period (useful life or retention period of 4 years, 48 months, to the exact date), the assets
- are eliminated from the operating assets
- are taken abroad.
Subsequent taxation is omitted:
- If the asset is eliminated on account of force majeure or as a consequence of intervention by the authorities.
Likewise, termination of the business which is necessitated by the death of the proprietor does not give rise to subsequent taxation if the business immediately ceases to exist as a result of the death (e.g. in the case of highly personal activities) or if no business is transferred to the heirs as a result of a renouncement of inheritance.
With regard to securities (for term-limited restriction on mortgage bonds, see above): if assets granted tax concessions of the fixed assets, which meet the requirements of the tax-free allowance, are acquired in the year of the elimination (replacement acquisition). They continue the remaining retention period.
Securities are not recognised as replacement acquisition assets. This means that acquired securities granted tax concessions must be held continuously in the operational assets for a minimum of four years. Subsequent taxation on account of a premature sale can be avoided only by means of a replacement acquisition of physical assets granted tax concessions in the corresponding amount. Hence the pure regrouping of securities is not granted any tax concessions.
- If securities are prematurely redeemed, securities granted tax concessions can be acquired instead of physical assets granted tax concessions within two months (securities replacement acquisition). They continue the remaining period unaltered.
- If the business is transferred with or without payment or if the type of profit calculation is switched. In this case, subsequent taxation is effected only if the assets are eliminated before the retention period expires.
Subsequent taxation is a material disadvantage if the base tax rate in the year of the subsequent taxation is higher than in the year of the claim on account of corresponding profits.
Any termination of business before the expiration of the 4-year period will result in subsequent taxation. The subsequent taxation amount is part of the capital gains.