Limited tax deductibility of social plan benefits deemed unconstitutional

Published 02 May 2022

The 2014 law on taxation changes [Abgabenänderungsgesetz, AbgÄG] introduced a partial ban on deducting so-called “golden handshakes” for tax purposes. Since that time, under section 20(1) no. 8 of the Income Tax Act 1988 [Einkommensteuergesetz, EstG] expenses for remuneration that constitute other remuneration as defined by section 67(6) EstG 1988 are not deductible unless they are taxable at the rate of six percent. The aim here was to render subjectively high “severance payments” unattractive (from a tax perspective).

The Federal Finance Court [BFG] ruled back on 8 April 2020 that social plan payments as voluntary severance payments are also covered by the ban on tax deductibility under section 20(1) no. 8 EStG in conjunction with section 12(1) no. 8 of the Corporate Income Tax Act [Körperschaftsteuergesetz, KStG] (BFG 8 April 2020, RV/7100845/2020). This meant that being non-tax deductible made social plans more expensive by up to 25 percent. This ruling by the BFG came at an “awkward time” and caused a great deal of uncertainty, as it was at this time that there was a wave of restructuring under way made necessary by the Covid-19 pandemic. The Supreme Administrative Court [VwGH] then ruled quite swiftly that the view taken by the BFG was not compatible with the legal situation (VwGH 7 December 2020, Ro 2020/13/0013). The VwGH took the position that partial deductibility applied. Under the “quarter rule”, a quarter of a person’s salary over the past twelve months, capped at nine times the maximum monthly contribution basis was deductible (i.e. up to EUR 51,030.00 in 2022). Under the “one-twelfth rule”, up to EUR 204,120 was deductible in 2022 in cases where a person’s length of service was demonstrably 25 years.  

The Constitutional Court of Austria [VfGH] has now ruled that (in the case of social plans), the limit on deductibility is unconstitutional as it violates the principle of equality (VfGH 16 March 2022, G 228/2021). Banning the deductibility of payments from social plans is not an appropriate way of improving the aspects of fairness and solidarity in tax law. What is required instead is that the different circumstances of individual severance pay arrangements made when an employer terminates the employment and severance pay disbursed as part of a social plan made as a result of a change in operations pursuant to section 109 of the Works Constitution Act [Arbeitsverfassungsgesetz, ArbVG] are treated differently. Conversely, the VfGH had no objections to the limited deductibility of individual “golden handshake” agreements. It ruled, however, that a constitutional interpretation of section 20(1) no.8 EstG 1988, enabling limited deductibility to be restricted to individual severance pay arrangements, but not social plan payments, is not possible. The regulation was therefore annuled in its entirety with effect from the expiry of 31 December 2022. 

Social plans are the result of negotiations, but can also be enforced against the will of the company owner by way of arbitration at an employment tribunal. This means that, although employee representatives cannot legally prevent restructuring, they can make such action less attractive by having an expensive social plan enacted. A social plan can have just such an effect particularly in cases where a profitable company intends to boost its profitability even more by making changes to its operations. While the economic situation of the company owner does indeed need to be considered when drawing up a social plan, severance payments made as part of such plans are not merely a function of the company’s performance, but also reflect the need to balance interests in a way that is both just and fair. It remains to be seen how the legislator will respond. It is more than likely that they will remove social plans completely from the restriction on deductibility, or perhaps only introduce such a restriction above a certain level.