Associations and Taxes
In general, associations are subject to taxation. They may be subject to corporate tax and value added tax (VAT). An association may, in given circumstances, enjoy tax privileges, notably if it pursues benevolent, charitable or ecclesiastical purposes.
Importantly, the Articles of Association must document that the association pursues a tax-privileged purpose. Moreover, the association must pursue such purposes exclusively and directly and deliver proof thereof through its actual business management.
If the purpose of an association is the promotion art and culture, it will in general be deemed to pursue a non-profit, tax-privileged purpose.
In order to assess whether the earnings of an association are subject to tax, one must distinguish between activities at the association level, and economic operations. Pure association activities without an economic purpose are not taxable. These must be services for which no consideration is asked for. This includes the
- collection of membership dues and donations
- free dissemination of information material with no any related earnings
- organisation of presentations, courses etc. free of charge.
Membership dues can be either “genuine“ or “ non-genuine“. “Non-genuine” dues are linked to a specific consideration, i.e. the members pay for a service that is offered by the association in exchange for the due, the related earnings are considered an “operational activity” of the association.
An association runs a dance studio. In exchange for the payment of a monthly membership contribution in the amount of EUR 50, the members may attend workshops and dance training courses. This is considered a non-genuine membership due.
Economic activities are divided into three categories:
- indispensable auxiliary operations: They serve the immediate purpose of the association and are tax-exempt (e.g. performances of a theatre association)
- dispensable auxiliary operations: While being related to the association purpose, they are not absolutely necessary to attain the objective of the association (e.g. pre-performance sale of drinks, small festivities organised by the association). Earnings from such activities are subject to corporate tax, if they exceed EUR 10,000 per year; they are VAT-exempt, however.
- non-privileged economic activities: Their exclusive purpose is to raise funds and they are therefore subject to corporate tax as well as to VAT. If the turnover of such an operation is more than EUR 40,000, the association must apply for an exemption in order to retain its public-benefit status for the remainder of its activities.
Natural persons are subject to income tax. Legal persons – such as associations – are subject to corporate tax. The corporate tax rate is 25% of the profit of an association’s economic activity (not from an indispensable auxiliary operation).
Privileged associations are subject to corporate tax to a “limited“ extent only. This means, if an “indispensable auxiliary operation” records a windfall profit, this profit is not subject to corporate tax. If, however, the association runs a “dispensable operation” or a non-privileged business activity, the resultant earnings are subject to tax, if they exceed the exempted amount of EUR 10,000 (EUR 7,300 for calendar years prior to 2013).
Mere association activities where there is no performance and consideration are not subject to VAT. Genuine membership dues, donations or grants are therefore not subject to VAT, because the association does not offer a direct consideration for these receipts. VAT liability can only arise for the economic operations of an association’s activities. If, then, a non-profit association carries out activities with a view to generating profits, and if there is performance and consideration, it may be subject to VAT. If, however, the activity is considered a “hobby“ for lack of purpose to generate an income, VAT does not apply.
Activities carried out within the framework of indispensable or dispensable auxiliary operations are always presumed to be a hobby, regardless of the amount of turnover generated. It is assumed that profits are not generated on a lasting basis.
Activities carried out within the framework of non-privileged operations with the sole purpose of raising funds for an association are considered non-business, if the turnover from these operations does not exceed EUR 7,500 in the assessment period.
Refutation of the hobby presumption
VAT-exempt associations are not entitled to deduct input tax. As many associations generally end up with a surplus of input tax, as their income largely consists of VAT-exempt grants, VAT-liability would be advantageous. In order to become VAT liable, an association must refute the hobby presumption with the tax office, e.g. submit evidence that its income evenly matches its expenditure: Including grants, but excluding donations and membership dues, the income must cover the expenditure. The association must at any rate attain own business earnings of a certain amount. Associations which are fully funded by grants cannot become VAT liable. If the tax office accepts the refutation of the hobby presumption, VAT liability arises. In such a case, genuine membership dues, donations and gifts are not subject to VAT. If however, donations are given in consideration for activities, they are subject to VAT (e.g. admission to a theatre performance against “pay as you wish“).
Non-profit associations may continue to apply the reduced tax rate of 10% even after 1 January 2016 (date when the tax rate for artistic performances was raised from 10% to 13%) (except for non-privileged business activities).
The small-business regime also applies to associations. A turnover of up to EUR 30,000 is zero-rated, which means that VAT need not be invoiced, but also that input tax cannot be deducted. If the association wants to deduct input tax, it must file an application with the tax office requesting that the standard taxation regime be applied. In this case, all receipts (with the exception of genuine membership dues, grants and donations) are subject to VAT. The standard taxation regime is binding for the association for a period of five years.
Earnings of Association Members and Other Persons
Members of the association or other persons may become active for the association either on an honorary basis or for a fee.
Officers (association members and auditors) generally act in an honorary capacity in the association. However, they may receive a tax free flat-rate expense allowance from the association of EUR 75 of per month (without having to prove any actual expenditure incurred) as well as tax-free travel and transport allowance. This amount applies to each individual association, so that persons who are active in several associations are entitled to this allowance several times. If, however, officers receive an income from an employed activity from the association, meaning that they are employed by the association, they are not entitled to a flat rate expense allowance.
Officers who provide services for the association beyond their honorary function may, depending on the type of activity, can do so on the basis of a contract for work or a contract for services. Persons who are employed by the association are not entitled to any special rules or benefits, i.e. the general provisions governing wage tax and social insurance apply.
An independent theatre company is set up as an association. The board members are also involved in a theatre production. For the duration of the rehearsals and performances, they may enter into a service contract or contract for work with the association similar to the remaining members of the group who are not members of the association, provided that this concerns a self-employed activity.
Record-keeping duties of an association
Associations must keep proper records of their revenue, expenditure and their assets.
For small associations (pursuant to sec 21 of the Austrian Law on Associations, these are associations whose income or expenditure does not exceed EUR 1 million per year in two consecutive years), it is sufficient to keep their accounts on a cash basis and to draw up a statement of assets. Such a statement lists the assets (e.g. operating and business equipment, cash holdings, bank deposits, amounts owed by banks) and liabilities (liabilities and provisions) as per the reporting date (generally the 31st of December). They are to give a view of the financial situation of the association. The revenue and expenditure accounts and the statement of assets must be prepared by the association’s Board within five months after the end of the accounting year.
Moreover, the association must notify the tax office of all fiscally relevant circumstances fully and truthfully (e.g. start of a taxable operation). These activities must be reported to the tax office within one month.