VAT regulations for supervisory boards in a state of flux
German federal fiscal court ruling dated 27 November 2019 (V R 23/19)
For many decades, it was an established fact that remuneration for supervisory boards in Germany would be subject to VAT in cases where the supervisory board member being remunerated had exceeded the limits for small businesses (EUR 22,000 in the previous calendar year and EUR 50,000 in the current one, as specified by the German Annual Tax Act (JStG) 2019).
The principle underpinning this rested on supervisory board members holding VAT-taxable entrepreneur status. The German tax authorities only made exceptions to this in cases involving public officials and civil servants – who are obliged to pay over all or part of their supervisory board remuneration to their employers under the provisions of civil service or public service law.
Apart from official and public duties, the authorities did not draw any further distinctions between specific types of supervisory board activity. This led to companies with a low input VAT deduction rate – such as banks, insurance providers, property firms and holding companies – incurring additional costs. In cases where input VAT does not qualify for deduction, or only partially qualifies, the input VAT that is non-deductible is also subject to German corporation and trade tax provisions governing non-deductibility of half the sum of any supervisory board remuneration. By contrast, the input VAT incurred by the supervisory board members on prorated vehicle and office-related costs, for example, did qualify for deduction.
FEDERAL FISCAL COURT DENIES ENTREPRENEUR STATUS OF SUPERVISORY BOARD MEMBER IN FIXED REMUNERATION CASE
In a ruling published on 6 February 2020, the Fifth Senate of the Federal Fiscal Court (V R 23/19 dated 27 November 2019) overturned the precedent it had set in case law by deciding that a supervisory board member who receives only fixed remuneration in return for his or her activities is not acting as a VAT-taxable entrepreneur, provided that the remuneration has no variable components and is not dependent on the member’s attendance at meetings or on the number of hours he or she actually works. The Federal Fiscal Court did not resolve the question of whether VAT-taxable entrepreneur status would be upheld in line with the case law precedent reflected in Section 2.2. (2), sentence 7 of the German VAT Application Decree ( UStAE) in cases where supervisory board remuneration contains a variable component.
As a supporting argument, the Federal Fiscal Court stated that the supervisory board member who was the subject of the case in question was not exposed to any economic risk. In this particular case, the supervisory board member was an executive at a parent company and had been delegated to the supervisory board of a subsidiary by his employer. The remuneration for the supervisory board activities carried out for this subsidiary had to be paid over to the employer and was offset at the point when bonuses were paid out. The disputed case in which the Federal Fiscal Court made its ruling bears a remarkable similarity to the exception provision that the tax authorities had only applied to public officials and civil servants up to that point. In the case of these persons, the authorities had already deemed that supervisory board activities with close links to duties performed under the terms of employment did not constitute independent entrepreneurial activities. However, the Federal Fiscal Court has expressly stated that its ruling is not based on any relationship of dependence that the supervisory board member may have with the parent company, or on the obligation to offset remuneration for supervisory board activities against the parent company. In addition to considering the lack of risk associated with the remuneration (which was purely of a fixed nature), the Federal Fiscal Court primarily referred to the principles that the European Court of Justice (ECJ) had established just prior to this in case “IO”, which had involved the supervisory board of a Dutch foundation (ruling dated 13 June 2019 – C 420/18). According to these principles, individual supervisory board members do not exercise independent powers in their role on the supervisory board, but instead act for and under the responsibility of the supervisory board as a whole. In the ECJ’s opinion, the members of a supervisory board do not operate independently within their mandate; rather, they are the subordinate members of a relationship with the body of the supervisory board.
THE FEDERAL FISCAL COURT ALSO REFUTES THAT A SELF-BILLING INVOICE FOR SUPERVISORY BOARD REMUNERATION EQUATES TO AN INVOICE
Another point worth noting is the Federal Fiscal Court’s ruling that settling supervisory board remuneration by way of a self-billing invoice showing VAT, in cases involving supervisory board members without entrepreneurial status, does not constitute unduly stated tax in accordance with Section 14c (2) of the German Value Added Tax Act (UStG). In the Federal Fiscal Court’s opinion, any liability for tax that the supervisory board member receiving the self-billing invoice may have does not justify stating VAT unlawfully.
The decisions reached by the Federal Fiscal Court and the ECJ apply to specific cases, so we should not be overly hasty in adopting them as general rules. Whether a supervisory board member is actually exposed to economic risk or not always comes down to the specific circumstances of each case. This is why, for example, the Federal Fiscal Court did not resolve the question of whether VAT-taxable entrepreneur status should be upheld in accordance with previous case law in cases where supervisory board remuneration contains a variable component. The tax authorities will now respond to the rulings of the Federal Fiscal Court and the ECJ, and will need to revise their position stated in Section 2.2. (2), sentence 7 of the UStAE. In practice, what often happens is that the individual members of a supervisory board are added to a D&O insurance policy, which is taken out and funded by the company, in the event of any claims being asserted due to breaches of duty. Although the Federal Fiscal Court and the ECJ did not examine the significance of insurance coverage in each of the two disputes, the existence of a D&O insurance policy funded by a company may be a further indication that it is possible to neutralise any financial risk associated with VAT-taxable entrepreneur status, regardless of personal obligations to assume liability.
In general, it should be possible to apply these principles to other supervisory bodies whose remit includes monitoring executives. One example may be an advisory board that a capital management company maintains in line with the German Investment Code (KAGB) or an inventory fund (as applicable prior to the introduction of the KAGB).
The new Federal Fiscal Court ruling means that supervisory board remuneration in future cases may be settled without VAT in full compliance with the law, provided that the supervisory board member in question only receives fixed remuneration and is therefore not exposed to any remuneration risk. We particularly recommend implementing changes in the case of companies that have no input VAT deduction entitlements, or only some, and that have a supervisory board. This will mean reviewing contracts and making amendments where necessary.
Until the tax authorities respond to the new Federal Fiscal Court ruling, and especially with a view to past circumstances, it is likely that companies will continue to uphold protection of legitimate expectations relating to input VAT deduction. This is because the authorities have not yet amended their stipulations on subjecting supervisory board activities to VAT with no distinction between types of activities (see Section 2.2. (2), sentence 7 UStAE) – despite the fact that the precedent set by the Federal Fiscal Court in case law is now outdated.
Members of supervisory boards maintained by companies with no input VAT deduction entitlements, or only some, should check whether they can reclaim any VAT paid, making reference to ECJ and Federal Fiscal Court case law. However, they should only do this where procedural law allows it and they would not be faced with a considerable loss of VAT deductions on inputs as a result. Companies should approach their supervisory boards with a view to this.
Variable supervisory board remuneration will also need to be handled on a case-by-case basis, as the Federal Fiscal Court has expressly left open the question of whether VAT-taxable entrepreneur status of supervisory board members is to be upheld in these situations. It is likely that the tax courts will continue to scrutinise this issue. As a precautionary measure until the matter has been fully resolved, variable supervisory board remuneration should continue to be settled in full with VAT in those cases that exceed the limit for small businesses.
Mazars is happy to help you assess the consequences of the current legal situation for your company, organisation or activity as a supervisory board member – feel free to get in touch.
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