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Tax aspects in connection with “sweat money/equity for work” – tax free income for the “Sweaters” ?!

In the course of the foundation of companies as well as subsequent financing rounds (capital increase), it is increasingly the case in the start-up area that – apart from the payment for the share capital – the financial investors additionally pay a premium in cash, while some investors commit themselves to the provision of unpaid work performance (comparable to a premium payment). This procedure is also known as “sweat money or equity for work”.

Basically the remuneration for work performance is subject to taxation at the level of the service provider. However with regards to sweat money it needs to be analysed whether it could be seen as a non-taxable usage contribution (“Nutzungseinlage”). Usage contribution means the transfer of money or goods to the corporation for use or the provision of services by a shareholder for no consideration or for an unreasonably low consideration.

In various cases, the Administrative Court has dealt with the tax assessment of management activities performed free of charge by a shareholder or with remuneration for the provision of capital or real estate by the shareholder to the corporation. In all cases an approach of fictitious remuneration has been excluded according to the fact that there was no arm’s length agreement and therefore no remuneration to be assumed. The Austrian tax authorities follows that approach.

Consequently the corporation does not have a contribution to be shown as an asset nor does it have a fictitious operating expense in the amount of the saved expenses. Apart from that no fictitious income is to be recorded at the level of the founder and the acquisition costs of the investment will not be increased.

The cases decided so far by the Administrative Court have dealt with the preferential services provided by shareholders, but without – and this is the difference – a connection to a directly linked granting of shares.

However, we are of the opinion that there are good arguments that sweat money/work for equity could be seen as usage contribution. In our opinion, the fact that a shareholder relationship exists could be seen in favour of a classification as a usage contribution. Apart from that we assume that the statement on usage contributions of the Austrian tax authorities are to be interpreted to a very large extent and therefore – in the absence of other concrete statements to the contrary – also apply to sweat money.

Christoph Puchner/David Gloser
ECOVIS Austria

Startup-Management-Team ECOVIS Austria:
David Gloser, Martin Grill, Barbara Hölzl, Christoph Puchner