Introduction
As a lawyer with a focus outside of tax law, I consider it important to address relevant legal issues that affect companies. The VAT treatment of supervisory board members is one such issue. It holds significant implications for business practice and is therefore relevant for many of my readers. The latest rulings in this area provide important insights into the current legal situation.
VAT Liability of Supervisory Board Members: The Legal Situation
The VAT treatment of supervisory board members, specifically whether their activities are considered entrepreneurial, has long been a subject of legal debate. Historically, tax authorities assumed that supervisory board members with a variable remuneration component of at least 10% of their total remuneration were to be considered self-employed and entrepreneurial. However, this view, particularly the rigid definition of a quantitative limit, has been consistently questioned in legal practice.
Key Decisions from Courts
Cologne Fiscal Court Ruling
The Cologne Fiscal Court addressed this issue in its ruling dated November 15, 2023 (9 K 1068/22). In the case, the plaintiff, chairman of the supervisory board of several stock corporations, received attendance fees exceeding 10% of his total remuneration. The tax office had classified him as entrepreneurially active.
However, the court ruled that meeting-based remuneration alone is not sufficient to establish an economic risk that characterizes an entrepreneurial activity.
European Court of Justice Ruling (TP case)
In a parallel case, the European Court of Justice (ECJ) issued a ruling on December 21, 2023 (C-288/22, TP case). This case concerned the activities of a member of the board of directors of Luxembourg stock corporations. The ECJ found no entrepreneurial status because there was no economic risk for the plaintiff. This was primarily due to the fact that performance-related bonuses did not constitute a concrete risk of profit or loss for the plaintiff.
Legal Assessment and Effects of the Rulings
The recent rulings from the Cologne Fiscal Court and the European Court of Justice bring clarity to the VAT treatment of supervisory board activities. They help to distinguish between entrepreneurial and non-entrepreneurial activities. These decisions have significant implications:
- For supervisory boards whose activities are deemed entrepreneurial, input tax deduction may now be allowed.
- Conversely, for boards whose activities are classified as non-business, VAT can become an unrecoverable cost for companies without input tax deduction rights. This can lead to an additional financial burden.
Fazit
The recent court decisions fundamentally reshape the VAT treatment for supervisory board members. Companies and board members must carefully re-evaluate their current practices to ensure compliance and avoid unexpected financial consequences. Consulting with legal and tax experts is highly recommended to assess individual situations.