According to a decision of the Federal Fiscal Court (Bundesfinanzhof), a supervisory board member who receives only fixed remuneration is not engaged in entrepreneurial activities from a VAT perspective.
This decision represents a departure from the previous approach and raises a number of follow-up questions.
Supervisory boards and companies should examine possible changes to the previous remuneration modalities in order to eliminate VAT risks.
Since only one individual decision has been handed down so far, case law should be closely monitored.
Every German public limited company - regardless of its size - has a body that is intended to supervise the work of the executive board: the supervisory board. Supervisory board members are remunerated for their work. In most cases, the remuneration consists mainly of a fixed amount, which may be supplemented by smaller variable components, such as attendance fees.
For many years, according to German case law, supervisory board members have been considered to be engaged in entrepreneurial activities - including from a VAT perspective. If the remuneration for the supervisory board activity exceeds €22,000 per year, the service rendered is generally taxable and also subject to tax, regardless of whether it is fixed or variable remuneration. According to the current legal situation, however, remuneration below €22,000 entitles the taxpayer to invoke the small business rule. This exempts the taxpayer from paying any VAT.
A decision of the European Court of Justice (ECJ) in June 2019 could now bring some changes to this practice, which has existed for years. The ECJ had rejected the status of an entrepreneur in the case of a group employee delegated to the supervisory board. The reason given was that a supervisory board member does not work independently, but only for the supervisory board as a body. Also, due to the remuneration being fixed, no economic risk would have to be borne from the activity.
Implementation of the ECJ ruling by the BFH
As a consequence of this ECJ decision, the V. Senate of the Federal Fiscal Court (Bundesfinanzhof) also decided in a ruling published on 6 February 2020 that a supervisory board member who only receives fixed remuneration for his or her activity, if that activity is neither dependent on participation in meetings nor on hours actually worked and also does not have any other variable components, is not acting as a VAT entrepreneur, as there is an absence of remuneration risk. While this is currently just an individual decision, it abandons the previous case law and contradicts the tax authorities' previously applicable legal interpretation.
The BFH has expressly left open the question of whether the ruling also applies to supervisory board members with variable remuneration. Overall, the ruling raises many questions for companies and supervisory board members alike and creates a certain degree of legal uncertainty.
What companies and supervisory boards need to consider
The basic question is whether or not to maintain the previous treatment of supervisory board remuneration as remuneration for an entrepreneurial, taxable other service of the individual supervisory board.
Especially for companies that are not or only partially entitled to deduct input tax, e.g. companies from the finance, insurance or health sectors, the non-deductible or only partially deductible input tax is a definitive economic burden. In these cases, companies could consider changing the structure of supervisory board remuneration and the associated VAT assessment of the corresponding activities. This could also be advantageous for the members of the supervisory board, as they would no longer have to declare their activities.
Also, if the previous VAT treatment is to be maintained, companies could consider consulting with the respective supervisory boards to account for the services in question within the receiving company's credit note procedure. The advantage of this procedure is that for a credit note issued to a non-entrepreneur, no tax liability can arise from an unauthorised tax assessment pursuant to Section 14c (2) UStG.
Protection of confidence for the past
Despite the rulings mentioned above, the tax authorities have not yet amended the previous clear regulations in the VAT Application Decree. This should give taxpayers protection of confidence for the past.
Nevertheless, both companies and supervisory boards should deal early with the above matters and any potential further questions concerning the remuneration models and should examine the opportunities and risks of changes. There may be action required on VAT as a result of this development in case law.