Tax treatment of Corona subsidies

With the multitude of different subsidies to mitigate the negative economic effects of the COVID-19 pandemic, the question also arises of how individual subsidies should be treated fiscally. Not every subsidy is automatically tax-free in itself, even if that would result in the maximum impact for companies affected by the crisis.

The basis for classifying the subsidies is the tax-exempt income defined in the Income Tax Act. This includes, in general, salaries or subsidies from public funds. In addition, the criterion is not only based on the source of funds but also on the use of funds (e.g., for research, study funding, etc.). The common COVID-19 subsidies are mostly funded from public funds. However, the use of funds (e.g., subsidies for fixed costs, investments, etc.) is problematic and is generally considered by law to be insufficient to meet the criteria for tax exemption under the EStG.

However, the legislator explicitly clarified (in § 124b Z 348 EStG) that subsidies financed from the COVID-19 crisis management fund, the hardship fund, or the Corona crisis fund – must be treated as tax-exempt (regardless of what the funding is used for). The following measures are financed from such „tax-free“ Corona funds and are therefore tax-exempt:

• Fixed cost subsidy I and II (800),
• NPO support fund,
• COVID investment bonus,
• Hardship Fund,
• Extension set,
• Loss of earnings under the epidemic law,
• Short-time work subsidy.

In contrast, the turnover allowance and the failure bonus are not tax-free.

To assess whether this tax exemption actually benefits the taxpayer, the withholding ban for expenses under § 20, paragraph 2, EStG or § 12, paragraph 2, KStG (business expenses deduction) must also be taken into account. The withholding ban indicates that a lack of tax liability on the one hand must be offset by a withholding ban on the other.

If the withholding ban comes into effect, the previously tax-exempt subsidies resulting from the reduction of costs will again result in an increase in the tax base, provided that the subsidy represents an expense in direct economic connection with non-taxable income. The withholding ban states that expenses may not be deducted insofar as they are directly linked to non-taxable income. Through this roundabout approach, where a direct link between the tax-exempt subsidies and the expenses exists, tax is again added, resulting in a neutralization of the tax exemption of the subsidy in the end. It is therefore questionable which subsidies have a direct link between the subsidy and the expenses. The following provides an overview of the classification per subsidy:

• Hardship Fund: this is a grant aimed at income replacement. Since there is no connection to the expenses, the hardship fund is truly tax-free; there is no withholding requirement.
• Loss of income under the Epidemiegesetz: since it is a replacement of income, there is typically also no direct economic connection to the expenses. Consequently, this grant is to be considered genuinely tax-free.
• Corona-Kurzarbeit (short-time work benefit): there is a direct connection between the funding and the personnel costs of the employees being supported. The supported personnel costs must therefore be taken into account, which increases the tax base and neutralizes the tax savings.
• Fixed cost allowance I and II (800): the link between the subsidy and the fixed costs leads to a prohibition on deduction under § 20, paragraph 2, of the EStG, provided that the subsidy actually covers operating expenses as well. Since this is not the case, for example, for the subsidized entrepreneur’s salary often paid out, parts of this subsidy are actually tax-free.
• Loss limitation clause: In this case, the deduction is directly linked to the „loss-producing“ expenses, whereby the prohibition on deduction under Section 20(2) of the EStG also applies here.
• Sales allowance: the sales allowance is explicitly taxable under § 124b Z 348, letter b of the EStG. The deduction prohibition does not apply.
• The performance bonus is subject to tax treatment, just as the sales compensation. The portion of the bonus that represents an advance on the fixed cost allowance II (800) is converted into a fixed cost allowance II (800) at the time of the offsetting, and is tax-free from that point onwards; the withholding tax for this portion also applies.
• Investment bonus: the investment bonus is actually tax-free and does not lead to any reduction in the purchase or production costs for the subsidized investment.

Image: © Adobe Stock - Photocreo Bednarek