(Re-)introducing wealth taxes in Austria: practical challenges

Assets and their transfer may already be subject to selective taxation in Austria. While property tax, land value levy and agricultural and forestry taxes are annually recurring wealth taxes for domestic property ownership, real estate transfer tax, the foundation entrance tax and the Austrian stamp duty on assignments relate to the value of single-asset transactions.

Double taxation

The introduction of a wealth tax (annual wealth tax or reintroduction of inheritance and gift tax) may lead to double taxation. In the case of recurring wealth taxes, double taxation may exist in income taxes as well as property tax.

If an inheritance and gift tax are reintroduced, double taxation would occur especially in regard to real estate transfer tax and, potentially, stamp duty. To avoid this, comprehensive tax exemptions would need to be introduced for gratuitous real estate transactions.

If a uniform and progressive tax rate was to apply to all taxable assets, individual asset components would have to be valued consistently and based on reality. Several valuation approaches have already been discussed so far.

Real estate

It is proposed to base the valuation of Austrian real estate on the "property value" defined and determined in the Real Estate Transfer Tax Act. This value does not correspond to the actual value of the property but is determined based on a separate regulation. While this property value is generally considerably lower than the actual market value of the real estate, the actual market value in the case of luxury real estate is even a multiple of the property value. Using even lower standard values (Einheitswert) for real estate without a new assessment of such standard values must generally be rejected according to Austrian constitutional law. There are also proposals for a contemporary property valuation that involve a property tax valorisation by the respective municipality. In the latter case, the valuation issue would be transferred to the municipalities without the corresponding expertise. To ultimately avoid the breakup of larger real estate assets, additional tax benefits will be required.

Operating assets and capital investment

Operating assets, including income from shareholdings, require a consistent (uniform) valuation that can be applied for all legal forms of businesses on the same basis, irrespective of the legal form. In Austria, the relevant expert opinion of the Austrian Chamber of Tax Advisors and Auditors (KFS/BW 1) primarily refers to a method based on future cash flows or discounted cash flows (DCF), and only allows stock market prices for a plausibility assessment of the valuation result. Pursuant to the Austrian Valuation Act, the market value of stocks, shares in limited liability companies and participatory rights is primarily based on the market value. Only if no market value is available would the value have to be derived from sales or estimated from the company's total assets and earnings prospects.

Foundation's status as a "beneficiary"

In the case of inheritance and gift tax, the granting of a beneficiary status of a foundation may also have to be considered in this respect.

Private assets

Another issue may be the valuation of private assets (jewellery, art, etc), because there are no representative, general valuation methods applicable.

Unawareness of asset components by the tax authorities

If wealth taxes are introduced, the tax authorities would have to compile and review a variety of possible sources of information. Instead of inheritance and gift tax, a general reporting requirement for gifts inter vivos was introduced, according to which such gifts must be reported when certain thresholds are reached.

Tax authorities may also be aware of asset transactions for a consideration or against no consideration through declarations/notifications in the context of income tax (in particular, sales of businesses, shares, real estate, capital income and gratuitous deposit transfer), foundation entrance tax and foundation entrance tax equivalent within the meaning of the Real Estate Transfer Tax Act (gratuitous donations to foundations) and real estate transfer tax (gratuitous transfers of real estate).

The existence of assets without preceding transactions may also be apparent from disclosed accounting records, the register on accounts (Kontenregister), the land register as well as standard value decrees (Einheitswertbescheide), the Ultimate Beneficial Owners Register, reports under the Common Reporting Standard Act, and disclosed transfer pricing documentation within the meaning of the Transfer Pricing Documentation Act.

On a cross-border level, the (automatic) exchange of information between national tax authorities should be mentioned. In addition, there are preliminary efforts by the European Commission to introduce a European wealth register.

In view of the confusing multiplicity and incompleteness of possible sources of information, considerable administrative work and a control deficit on the part of the tax authorities are to be expected. The relevant documents are also likely to be available for the past, often up to the 1990s. Although the tax authorities may destroy physical files, electronic files are likely to be kept for far longer.

The introduction of a recurring wealth tax(es) or inheritance and gift tax will pose major practical difficulties for the legislator, the tax authorities and the individual taxpayer. The practical issues of asset valuation as well as the considerable administrative burden for the tax authorities and the taxpayer will probably not be resolved to the satisfaction of all parties.

authors: Marco Thorbauer, Tobias Hayden