The Austrian government recently presented the planned tax reform. In addition to the measures for families and employees (e.g. lowering the income tax rate, lowering the health insurance contributions for employees for whom the lowering of the income tax rate has no effect, increasing the family bonus, CO2 pricing and so on), numerous measures are also planned for companies. Whether and how the planned measures could affect startups will be analysed on the information leaked so far. So much in advance – there must be more in it for startups:
- Tax reform 2021: overview of planned measures for companies
- Gradual reduction of the 25 percent corporate income tax rate to 24% in 2023 and to 23% as of 2024.
- A new employee participation model should enable companies to allow employees participate in companies’ profits with up to 3,000 euros tax-free.
- Introducing an investment allowance (“Investitionsfreibetrag”) including a greening component, with a cap per company.
- The existing profit allowance (“Gewinnfreibetrag”), applicable for natural persons with business income, will be increased from 13% to 15%.
- The limit for low-value assets, which can immediately be fully deducted as business expenses, is to be raised from 800 euros to 1,000 euros.
- Effects of individual relevant measures of the tax reform for startups
Corporate income tax reduction
The main part of the entrepreneurial relief, the intended reduction of the corporate inome tax rate, won’t support startups as they almost always make losses in the initial or development phase and therefore don’t pay corporate income tax (except minimum corporate income tax). Of course some successful startups will benefit from the reduction – at a later stage. However, it is almost impossible that because of the insignificant reduction any startups will settle in Austria.
Reduction in wage tax rates
The reduction of the individual income tax rates will provide a positive effect for startups employees and will therefore reduce labour costs. However comparing to other European countries, labour costs (including non-wage costs) remain at the top of scale in Austria which means that employment remains extremely expensive, even if the income tax rate will be reduced.
Investment allowance
Investment allowances are used to promote investments and, from the company’s point of view, usually represent a tax expense. Since startups regularly show losses, especially in the initial or development phase, an investment allowance would not have an immediate effect. Therefore the planned investment allowance – with a comparable structure as in the past – can hardly be used by startups.
Employee Participation
Due to the existing legal regulations employees already can grant free or discounted shares tax free by a value of 3,000 euros per year. By now it is not said how the new employee participation model will be designed in detail. For example, tax exemption would be conceivable if the payment is linked to the company’s profits. However, this means that employees of companies that do not show a profit would not benefit from the preferential treatment and would therefore be disadvantaged (eg startups in the initial phase). Apart from that the planned employee participation would be an additional advantage for employees, but certainly not decisive in the “war for talents”.
In that context it should be pointed out once again: for many years, the Austrian startup community has been calling for employee participation to become more attractive. Currently, the free or discounted granting of participation in the startup (benefit in kind) is subject to full wage tax and social security – calculated from the market value of the startup. Since the market value is mostly derived from previous investment rounds, massive tax burdens would arise at the time the shares were granted, even without any cashflow.
That this problem can be dealt differently can be seen within the latest German legislation: the taxation of benefits in kind in the case of free or discounted employee shares for young SMEs (which also includes startups) can be deferred over 12 years. Furthermore, depending on the holding period, a reduced tax rate can be applicable.
It is therefore to be hoped that in this respect a really great solution to this issue will still follow.
- Outlook
To summarize this topic it has to be said that the planned tax reform 2021 is disappointing from the eye of a startup. Since startups play a central role in Austrian economy and show positive effects on economic growth as well as innovative strength the tax reform could have implemented more specific tax reliefs to support this branch.
What really needs to come urgently for the startup sector and is currently not (yet) on the government’s agenda are well-known startup demands as for example:
- attractive framework for employee participations
- loss compensation and loss carry-forward ability for startup investments
- participation allowance for startup investments
- equalization of convertible loans with securitized corporate financing, so that conversion – contrary to the current restrictive opinion of the BMF – does not constitute a taxable exchange (this also corresponds to the view of the German tax authorities).
Conclusion: Hope dies last – there must be more possible (at least in the medium term) for startups in Austria!
Authors:
Christoph Puchner, Managing Partner and Tax Advisor
& Katharina Geweßler, Tax Advisor from ECOVIS Austria,
one of the leading tax consultants in Austria in the startup sector
