From January 1, 2024, if the new startup employee participation scheme is used, taxation will be deferred under certain conditions (since taxation only occurs upon a later occurrence, typically upon the sale of the shares), and a preferential tax regime will be available. Below, certain selected practical questions related to the new tax employee participation regime will be examined.

Benefits only for genuine employees?

Only tax employees are included, while freelancers and contractors are not included. In this context, the question also arises as to how employees who are hired through external providers should be treated (e.g., temporary employment agencies, "employer of record" structures [an employer of record is usually a third-party company that handles compliance activities related to hiring employees, but does not recruit the employees; the effective employer is the one who makes decisions regarding compensation, tasks, vacation days, projects, and termination of employees]).

In such cases, it is therefore necessary to analyze whether the new tax employee participation regime should be based on the civil-law employer or the commercial employer (which may be relevant for DTA purposes). Since the provision of Section 67a of the Income Tax Act originates from domestic tax law, we believe there is some evidence that the term "shares in the employer's company" refers to the civil-law employer in domestic tax law.

Are equity shares in foreign startups also included?

According to administrative practice, the term "capital shares (participations)" includes, in particular, shares, interim certificates, and GmbH shares, as well as participation rights. This also includes the enterprise value shares introduced by the GesRÄG 2023 (Corporate Shares Act) pursuant to Section 9 of the FlexKapGG (Flexible Capital Investments Act).

Since the wording of the law does not restrict this to Austrian startups, we believe that shares in foreign startups are also included (provided the foreign startup is a foreign company comparable to an Austrian corporation, the requirements of Section 67a of the Income Tax Act are met, and there are employees resident in Austria for whom wage tax is deducted [e.g. employees in an Austrian permanent establishment or Austrian home office, etc.]).

How should operational activities be taken into account before the company is founded?

The startup may be no more than 10 years old (calculated from the end of the calendar year of its founding) when granting employee participation. According to Section 67a Paragraph 2 Item 3 of the Income Tax Act (EStG), the establishment of a company is defined as the creation of a previously non-existent operational structure within the meaning of Section 2 Item 1 of the New Business Act (NeuFÖG). If a company consists of several businesses or divisions, the establishment of the first business belonging to the company is taken into account.

Taking into account the statements of the tax authorities regarding the New FöG (see NeuFöR, margin no. 82), it can be assumed that business transfers due to reorganization within or outside the Reorganization Tax Act, as well as business transfers by means of an asset deal, do not lead to a "restart" of the 10-year period and therefore cannot lead to the use of the startup employee participation scheme.

What aspects need to be considered when moving away in connection with startup employee participation?

If startup employee participation is granted, both the monetary benefit at the time of granting and any increases in value are considered income according to Article 15 of the OECD Model Tax Convention (income from employment, since it continues to be employment income despite the granting of shares and the new tax regime for employee participation), as long as the employee cannot freely dispose of the participation.

Therefore, if an employee works in different countries between the granting of the startup employee participation and the free disposal of the participation (e.g., if the transfer restriction is lifted) due to the employee's relocation, the income must be apportioned according to the number of days worked during this period (causality principle), in accordance with the explanations in the government proposal. Consequently, the employee's relocation or the relocation of the place of work abroad alone does not, in principle, lead to any restriction of Austrian taxation rights (there is no separate relocation event for employees).

Apart from that, Section 67 Paragraph 3 Item 5 of the Income Tax Act also includes the relocation of the startup itself as a further inflow event (i.e. the domestic startup moves abroad), provided that the Austrian obligations in connection with payroll taxes are no longer voluntarily met by the future foreign startup after the relocation.

This article was written by David Gloser (Partner, Tax Advisor and Auditor) and Christoph Puchner (Partner and Tax Advisor) of ECOVIS Austria. ECOVIS Austria is one of Austria's leading tax consulting firms in the startup sector.