VAT on remuneration as a director of a limited company
March 15, 2011 | 50,00 EUR | answered by Michael Herrmann
Dear Sir or Madam,
I have been appointed as the managing director of a Limited company in which I do not have any shares. I receive a monthly fee depending on the company's turnover. Is the fee I receive subject to value-added tax? The managing director contract does not mention anything about VAT. Is this sufficient, or should there be a different arrangement in place? As far as I know, the Ltd has not claimed any input tax on the fees. Thank you in advance for your prompt response.
Dear questioner,
first of all, thank you for your inquiry, which I would like to answer based on the information provided and in the context of your involvement in an initial consultation. The response is based on the description of the situation. Missing or incorrect information about the actual circumstances can affect the legal outcome.
The main issue in the factual situation is whether you are considered self-employed as the director of the Limited or classified as an employee. In the case of self-employment, the director's services are subject to VAT. Otherwise, you receive wages with social security implications.
An entrepreneur can deduct the separately stated VAT on invoices for supplies or services provided by other companies for his business as input tax (§ 15 UStG). It is crucial that the director providing services for the corporation is an independent entrepreneur (§ 2 UStG). This is the case when the director carries out his activities on his own account and own responsibility. The activity is not independent if the director is so integrated into a company that he is obliged to follow the instructions of the company. Employees are usually subject to instructions in this sense.
Since the Federal Fiscal Court ruled in 2002 on the VAT liability of management and representation services provided by a GmbH to a GbR, it expressed its opinion with a judgment dated 10. 3. 2005 - V R 29/03 on the independence of the director of a GmbH. The case law so far only refers to GmbH directors. Since the Limited is also a corporation, the case law is applicable accordingly.
The BMF letter (letter from the Federal Ministry of Finance as administrative instruction) dated 21. 9. 2005 - IV A 5 - S 7104 - 19/05 has taken up and explained the principles of the aforementioned judgment. It is explicitly clarified once again that the question of the independence of natural persons for VAT, income, and trade tax is to be assessed according to the same principles. The provisions in the employment contract are crucial for assessing independence. It depends on the individual case. A contractual provision stating that the director can determine the time, extent, and location of the activity at his own discretion according to his employment contract alone is not sufficient to assume independence. Conversely, independence cannot be excluded simply because the director is required to provide his services at certain times. However, if the employment contract stipulates that the director can determine the time, extent, and location of his activity at his own discretion, without being bound by the company's regulations, this supports the assumption of independence. The fact that a director is considered independent in terms of social or labor law, i.e., is not subject to social security obligations, does not necessarily mean that he is independent for tax purposes. However, being exempt from social security obligations is an indication that the director is independent. On the other hand, factors that may indicate dependence include provisions in the employment contract such as entitlement to vacation, entitlement to other social benefits, or continued payment of remuneration in case of illness, especially with monthly fixed salaries.
Based on your information, the status as an entrepreneur cannot be verified remotely. You should have the situation examined specifically to gain certainty and avoid any retroactive tax or social security payments.
I hope that these explanations have provided you with a sufficient overview of the situation within the scope of your involvement and this initial consultation, and remain
Yours sincerely
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax consultant
