Amendment of the German VAT Application Decree on supervisory board remuneration - BMF circular letter dated 8 July 2021

In 2019, the European Court of Justice (ECJ) ruling of 13 June (C-420/18) in the “IO” case had caused a stir because, contrary to the practice of the German tax authorities, the ECJ had judged the economic activity of a supervisory board member to not be independent and thus not VAT-taxable. The German Federal Fiscal Court (BFH) followed this by also denying taxability for a case in which the supervisory board member did not bear any economic risk (ruling of 27 November 2019, V R 23/19). The German Federal Ministry of Finance (BMF), which had previously assumed taxability without exception, is now adapting Sections 2.2. and 18.6. para. 1 of the German VAT Application Decree (UStAE) to the case law in a letter dated 8 July 2021.

Retrospection: The ECJ criteria

In the “IO” case, the ECJ ruled that a supervisory board member was not in a relationship of subordination to the controlled company – a circumstance which in itself is an indication against independence. However, the other criteria for independence were not met: The member could not exercise the control powers in his own name and for his own account, since it was not the individual member but the supervisory board as a whole that was called upon to do so. The member also does not act on his own responsibility, as he is not liable for damages resulting from his activities. If a fixed rather than performance-related remuneration was agreed, the supervisory board member did not bear any economic risk. It follows from all of this that a supervisory board member with a fixed remuneration does not exercise an independent activity which would be subject to VAT.

The main provisions of the BMF letter

If a supervisory board member receives a fixed remuneration and thus bears no remuneration risk, he or she is not independent and the remuneration is therefore not subject to VAT. Fixed remuneration shall be deemed to exist in particular in the case of lump-sum expense allowances. Meeting attendance fees, which are only paid in the event of actual participation, and expense allowances based on actual expenditure are not fixed remuneration.

The BMF also addresses the case of mixed remuneration, which has not been decided by the ECJ and the BFH. If the variable components amount to at least 10% of the total remuneration, including expense allowances received (but excluding travel expense reimbursements), the supervisory board member is in principle independent. This must be examined separately for each supervisory board mandate. In justified cases, exceptions to this rule should be possible, but the BMF does not give any further indications as to when such an exceptional case may exist.

A special rule is provided for civil servants, other employees of a territorial authority and members of the federal or state government under certain conditions. If these supervisory board members are obliged to transfer part of the remuneration received to the employer, it is not to be objected if the activity is treated as dependent despite the existing remuneration risk.

Application/scope of action/open questions

The provisions of the BMF circular letter are applicable in all open cases. However, it is not objected if Section 2.2. para. 2 sentence 7 and para. 3 sentence 1 UStAE are still applied in the previous version to supervisory board activities performed until 31 December 2021 and the supervisory board activity is generally treated as VAT-taxable. This also applies to the company’s input VAT deduction.

The regulations of the BMF open up a certain scope of action even after the non-objection period has expired. This is particularly interesting if the company concerned is not entitled to deduct input VAT: If a variable remuneration component is waived or care is taken to ensure that it does not exceed the 10% limit, the supervisory board member can issue invoices to the company without VAT. However, it must be borne in mind that the supervisory board member then cannot claim an input VAT deduction with regard to any expenses for their activities.

The question is open as to whether employees of a company who in this capacity hold a seat on the supervisory board of another – possibly affiliated – company and are obliged to transfer part of the remuneration received to the employer, should be treated like civil servants as described above, meaning that their activity is regarded as dependent.

It is also unclear whether the case law of the ECJ and BFH can be applied beyond supervisory boards to other bodies, such as advisory boards (German: “Beiräte”). If, according to the criteria of the ECJ decision in the “IO” case, there is no independence (meaning, no activity in one’s own name, on one’s own account and on one’s own responsibility as well as no remuneration risk), this seems conceivable. These conditions would need to be carefully examined on a case-by-case basis. Treatment as non-taxable should be disclosed to the tax office in these cases, which have not been clearly regulated to date.