Classification of supervisory board members for tax purposes
At the level of the paying corporation, the remuneration or expense allowance for supervisory board members constitutes business expenses for income tax purposes. Under the so-called partial income rule – the restriction on the deductibility of expenses related to tax-exempt income -, in Section 10 no. 4 of the German Corporation Tax Act, only half the amount of such expenses should be taken into account with a view to reducing the tax liability.
From an income tax perspective, supervisory board members generate self-employment income. Up to now, for VAT purposes, supervisory board members in Germany had generally been viewed as contractors with the result that they had to charge and pay VAT for their activities and the respective companies were able to deduct the input tax arising from the services provided by the supervisory boards. The supervisory board members themselves were able to deduct the input tax from incoming transactions.
The previous interpretation of the law by the BFH
According to the established case law of the BFH, a supervisory board member is a contractor for VAT purposes. S/he renders a service in return for payment within the meaning of Section 1(1) no.1 of the German VAT Act. A contractor is anyone who performs a commercial or professional activity independently. By contrast, an activity would not be performed independently if a natural person was so integrated into a company that s/he would be obliged to follow the instructions of the business owner.
Up to now, such integration into the business of a company has been denied for supervisory board members and self-employment has been affirmed. In these cases, the basis of the BFH argument was that, according to Section 111 of the Stock Corporation Act (Aktiengesetz, AktG), the supervisory board is entrusted with the supervision of the management. Therefore, the supervisory board itself and its members are not bound by the instructions of the management board. Accepting a position on a supervisory board does indeed mean that a contractual relationship is established with a company; however, there is no principal or employer whose instruction or will form the basis according to which the supervisory board member has to act (cf. BFH rulings from 27.7.1972, case reference: V R 136/71, German Federal Tax Gazette (Bundessteuerblatt, BStBl) II p. 810; from 20.8.2009, case reference: V R 32/08, BStBl 2010 II p. 88).
New legal situation due to an ECJ judgement and ...
In its judgement from 13.6.2019 (“IO” case, reference: C – 420/18) on the contractor status of a supervisory board member at a Dutch foundation, the ECJ had rejected contractor status in view of the absence of independence for the supervisory board member. Based on the interpretation of Art. 9 of the EU Directive on the VAT system, anyone who performs such an activity in a relationship of subordination cannot be deemed to be independent. The crucial point here is whether or not the affected party performs his/her activities in his/her own name, for his/her own account and under his/her own responsibility and whether or not s/he bears the economic risk associated with performing these activities.
... its implementation by the BFH
The ECJ judgement has been endorsed by the BFH subject to its previous case law and in the event that the supervisory board member bears no economic risk. In the case in question, from 27.11.2019 (case reference: V R 23/19 and V R 62/17), the member of the supervisory board making the claim participated, as a supervisory board member, merely in the decisions of the supervisory board that had to be taken on the basis of a resolution. In addition, he bore no economic risk with respect to his work as a supervisory board member since he received the same annual fixed remuneration that did not have any variable remuneration components whatsoever. Negligent conduct would not have directly affected the remuneration but would merely have established a responsibility under Section 116 AktG, according to the BFH.
Conclusion: Whether or not a supervisory board member bears an economic risk is a question for each individual case and, consequently, leaves room for structuring. Given the circumstances of the case in question, the BFH did not have to determine the cases where the work of a supervisory board member could still be regarded as being performed on a self-employed basis and, therefore, this issue was expressly left open by the court.