The role of taxes

Taxes, fees and social security contributions

Taxes are mandatory payments to the government. Citizens and companies pay taxes at national, regional and municipal level. Tax money is used to finance public spending for the construction of roads, bridges or social infrastructure, for example. Governments also want to influence private spending. Therefore, they impose higher taxes on certain goods.

• Taxes are payments that finance the expenditures of the government. When you pay a  specific tax, however, you do not directly get something in return. If a company pays VAT to the Austrian tax office, for example, it is not specified what exactly the government must spend this money on.
• For fees, though, you always get something specific in return. For the issuing of a new passport, for example, you have to pay a fee. In return, you will then receive a passport.
• Other services are financed through social security contributions. A majority of the working population pays such contributions. This includes contribution payments for health, pension and unemployment insurance. If an employed person gets sick or loses their job, for example, their health or unemployment insurance will provide financial support to them (paid sick leave or unemployment benefits).

Depending on what they finance, different taxes, fees and social security contributions are paid at municipal, regional or federal level. Property tax revenue, for example, goes to the municipalities. Entertainment tax, is paid at regional level while social security contributions are paid at federal level. These revenue streams cover corresponding expenses at each level.

The majority of tax money, however, is shared federal tax revenue. Municipal, regional as well as federal authorities each get to administer a part of these. Shared federal tax revenues include wage tax, income tax, VAT as well as other important taxes. The distribution of shared federal tax revenues takes into account the number of inhabitants. The more people live in a region or municipality, the higher the share in federal tax revenues allocated to the region or municipality.

Why pay taxes, fees and social security contributions?

Taxes, fees and social security contributions help to finance public spending. Citizens and companies do not immediately receive anything in return for the taxes they pay. Instead they receive so-called transfers and other public goods.

Governments can use taxes as an instrument to balance out social inequalities. People who earn more usually also pay higher taxes. Governments can spend the additional tax money for programs to support people in need, for example. Taxes can thus pave the way to more fairness in society. When wealthier people pay higher taxes, this tax money can be used to help out those with lower incomes, due to illness, old age or childcare responsibilities, for example. Taxes can also influence people’s and companies' behavior. If the government wants to discourage unhealthy or environmentally harmful behavior and motivate people to consume less tobacco, alcohol or fuel, for example, it can raise taxes on each of these goods. Though, tax incentives, such as an allowance for eco-friendly goods, can promote environmentally friendly behavior. 

Types of tax in Austria

All citizens are obliged to financially contribute to the provision of public services. This obligation exists even for those who do not benefit directly from these services. 

The most important tax revenue stream in Austria is from value-added tax (VAT; German acronym: USt). It accounts for just over a third of Austria's tax revenues. VAT is levied on certain transactions as defined by law, primarily on the delivery (selling) of products and services. If an entrepreneur’s turnover is above a certain threshold, they are subject to VAT. According to the applicable tax rate, they calculate VAT as a ratio of the remuneration for their turnover (net amount/price). VAT is then added to this remuneration and the recipient of the product or service has to pay the total or gross price to the entrepreneur. The government collects the VAT portion from the company that provides the product or service.

In Austria, wage tax (German acronym: LSt) generates the second-most important revenue stream from taxes. It represents just under a third of the country’s total tax revenue. Employers withhold wage tax before paying wages or salaries and pay it directly to the tax office. It is a special type of income tax.

People pay income tax (German acronym: ESt) based on an income tax return they submit to the tax office. The Austrian tax office relies on this tax return to determine how much income tax you owe. In its assessment, it takes into account whether you already paid wage tax. If so, the paid amount will be deducted. Wage and income tax are subject to the same progressive tax rate. Progressive means: the higher your income, the higher the tax rate.

While individuals must pay income tax, companies are subject to corporate income tax (German acronym: KÖSt). Corporate income tax is imposed on legal persons, such as stock corporations (German acronym: AG) or limited liability companies (German acronym: GmbH). Corporate income tax amounts to 23% (in 2024), no matter how much profit a company makes. This means that corporate income tax is not progressive, but flat. 

Another important tax in Austria is investment income tax, sometimes also called capital gains tax (German acronym: KESt), as it is due for capital gains. Capital gains include income from financial assets, such as interest on savings, dividends or profits from the sale of capital assets. If a company distributes profits, these are also subject to investment income tax. It is a flat tax, too, set a rate of 25% (in 2024) for interest on savings accounts and current accounts. For other forms of investment income, such as profits paid out by corporations, it is set at a rate of 27.5% (in 2024). Banks and other financial institutions withhold these tax shares from your capital gains and pay them directly to the tax office. 

In Austria, other excise duties and transfer taxes include taxes on tobacco, mineral oil and a property purchase tax. . 

Value-added tax

In Austria, the standard value-added tax (VAT) rate is currently 20%. There is a reduced VAT rate of 10% for certain products and services, such as basic food, books and apartment rentals. The tax rate for selling animals, plants or firewood or for the admission to a sports event, for example, is 13%. For further information about VAT, see the Austrian government’s Business Service Portal (USP). 

If an entrepreneur buys a service from another entrepreneur and meets a number of legal requirements, they are allowed to reclaim VAT paid on related invoices from the tax office under the heading of input tax (VSt). In other words: If a company pays VAT to a supplier, this does not cause any real cost as these amounts are recognized as input tax. And the VAT a company finally has to pay on its turnover is reduced by any input tax previously paid within the supply chain. This is different for small businesses with very low annual turnover. These are exempt from paying VAT on their turnover but do not get to reclaim input tax. 

As most companies are able to reclaim VAT in the form of input tax, VAT is ultimately paid by the end consumer. Unlike taxable entrepreneurs, they cannot reclaim VAT included in the price from the tax office. 

Wage tax in detail

On their pay slips employees see their gross pay. Gross pay is the total remuneration employees receive for their work. Of this, only their net pay is paid out. You can calculate the net pay by taking gross pay and deduct taxes and other payments for public services. These include social security contributions for public health insurance, unemployment insurance and pension insurance as well as other contributions and wage tax. Employers directly transfer them to the relevant institutions. Wage tax, for example, is transferred to the tax office, while public health insurance contributions go to social security institutions. 

Austria has a progressive tax rate for both wage and income tax. This means: the higher your income or wage, the higher the tax rate. The tax base is used to determine which tax rate applies. You can calculate it by taking gross pay and deducting public health and unemployment insurance contributions as well as a number of other deductibles. Wage and income tax rates are basically the same. For employees, there are additional tax credits (for transportation expenses, for example, or for retirees who are still employed), exemptions and special provisions regarding the taxation of certain bonuses, such as a Christmas bonus or a vacation bonus. If a person earns less than a certain amount (in 2024: EUR 12,816/year), they have to pay social security contributions but no income tax. If your income, wage or salary surpasses this limit, there are different tax brackets. There are further tax privileges, for overtime, for example. 

Your net pay is your gross pay minus social security contributions and wage tax. 

In Austria, due to inflation, employees were regularly placed in higher tax brackets, until the next tax bracket system reform would be implemented. This effect was called bracket creep. In 2023, the Austrian parliament decided to adapt income and wage taxes in line with inflation, to offset bracket creep effects. This means that tax brackets are adjusted on a yearly basis, mostly in line with inflation. This change was made to ensure that people do not have to pay more taxes just because prices go up and income may be adjusted accordingly. Inflation also has an impact on other tax items: e.g. tax credit for children, tax credit for single-income families as well as tax credits for transportation expenses. These items are also adjusted in line with inflation. 

The employee tax assessment

In Austria, the employee tax assessment allows employees to have their annual wage tax bill recalculated to take into account certain tax-deductible expenses and claim potential tax refunds. Wage tax calculations assume a constant income flow throughout the year, regardless of whether there were fluctuations or not. Fluctuations occur, for example, when we change jobs. Costs for work equipment, transport and continuous professional development or special expenses, such as donations, can also be taken into account. If you have paid too much tax, you can ask for a refund.