Decision by the Austrian Federal TaxCourt (BFG) on the issue of fault regarding violations of the prohibition on deduction pursuant to section 20 para. 1 subsec. 7 Austrian Income Tax Act (EStG) (“manager remuneration”)

In our previous newsletter we reported on a recent decision by the BFG (BFG 1 December 2023, RV/2100533/2023) strictly interpreting section 29 para. 6 Austrian Tax Criminal Code (FinStrG) (see our newsletter). In this decision, the BFG also makes interesting statements on the issue of fault regarding violations of the prohibition on deduction pursuant to section 20 para. 1 subsec. 7 EStG (“manager remuneration”). Also in this matter a strict standard regarding diligence is applied.

Statutory provisions

Section 20 para. 1 EStG reads in part as follows (in German):

„(1) Bei den einzelnen Einkünften dürfen nicht abgezogen werden:

[…]

7. Aufwendungen oder Ausgaben für das Entgelt für Arbeits- oder Werkleistungen, soweit es den Betrag von 500 000 Euro pro Person und Wirtschaftsjahr übersteigt. […]“

(Translation for information purposes only):

“(1)The following is prohibited to deduct from the individual types of income:

[…]

7. Expenses or expenditures for the remuneration for work performed or services provided if exceeding the amount of EUR 500,000 per person and financial year. […]“

Section 8 para. 3 FinStrG reads as follows (in German):

„(3) Grob fahrlässig handelt, wer ungewöhnlich und auffallend sorgfaltswidrig handelt, sodass der Eintritt eines dem gesetzlichen Tatbild entsprechenden Sachverhaltes als geradezu wahrscheinlich vorhersehbar war.“

(Translation for information purposes only):

“(3) A person acts with gross negligence when the person acts unusually and notably without proper care in a way that a matter corresponding to a criminal offence was very likely to occur.”

The facts of the case of the decision by the BFG

The taxpayer submitted a voluntary self-disclosure for the corporate income tax from 2016 to 2018 and for adjusted corporate income tax among others due to errors in connection with the prohibition on deduction regarding manager remunerations exceeding EUR 500,000.

In the legal proceeding the complainant took the position that the error in connection with manager remuneration neither constitutes intent nor gross negligence and explains this with internal communication deficits. In the complainant’s company the accounting department was not provided salary details of individual persons by the human resources department due to a group data protection policy (so-called “Chinese wall”). This made it more complicated for the accounting department to notice when the limit of EUR 500,000 was exceeded and to correctly implement the prohibition of deduction according to section 20 para. 1 subsec. 7 EStG.

Remunerations of one managing director of the complainant have exceeded the limit relevant for the prohibition of deduction and overstated operating expenses were claimed since the prohibition on deduction was not considered.

Point of law

The BFG had to assess – as preliminary question regarding the legality of the assessment of a tax increase pursuant to section 29 para. 6 FinStrG – whether intentional or grossly negligent behaviour is concluded from the present facts of the case.

Decision of the BFG

The BFG decided that the taxpayer acted at least unusually and notably without proper care which is why the taxpayer is accused at least of tax evasion committed with gross negligence. The BFG justifies this as follows:

• • The prohibition on deduction entered into force in 2014 and the complainant did not correctly take it into account until 2021. In the opinion of the BFG this long period indicates gross negligence.
  • Moreover, the new provision was discussed extensively and critically not only in circle of experts but also in (everyday) media (widespread presence in the media).
  • The BFG derives from these two items that the taxpayer and its tax representative must have been aware of the prohibition on deduction. The fact that despite this information it was not ensured within the company that the relevant data for identifying that the limit (EUR 500,000) is exceeded and implementing the prohibition on deduction is available to the competent internal departments (accounting) is – according to the BFG – an organisational failure.
  • Moreover, the remuneration of one managing director of the taxpayer exceeded the relevant limit and triggered the prohibition on deduction. According to the BFG it was the responsibility of the management board in its function as body of the complainant to indicate that the limit was exceeded and to ensure correct tax treatment.

Conclusion and support

The decision shows clearly that it is indispensable within a group that the information for monitoring the limit on manager remuneration is available to the employees responsible for the Austrian tax return (accounting, tax department, etc.), their supervisors and the local tax representatives, irrespective of data protection concerns or general confidentiality requirements.

Practice shows that monitoring this is very challenging, especially in international group structures – for example when remuneration and non-cash benefits of various kinds (such as bonuses, stock options, housing etc.) are received from different group companies. For information gathering in certain constellations (managers are appointed to various roles in different group companies) it may be required to approach persons potentially receiving high income.

In our opinion it is to be assessed in each individual case whether a violation of the prohibition on deduction was in fact committed with gross negligence. Some arguments of the BFG in any case appear valid.

In light of this BFG decision a correction of a violation of the prohibition on deduction pursuant to section 20 para. 1 subsec. 7 EStG should include the requirements of a voluntary self-disclosure (section 29 FinStrG) for reasons of prudence.

It is decisive to be able to relay on an experienced, internationally and interdisciplinary (payroll, transfer pricing, tax criminal law, tax procedural law, tax technology) well-positioned partner when monitoring compliance with the prohibition on deduction and for remediation of tax offenses in an international context. Our experts would be happy to support you with implementing monitoring measures (SKS) and with error remediation.