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EUROPE: "System head Germany plus" report

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back to index backEUROtalk June,  2005

Germany: Salaries of managing director may be subject to VAT

In a recently published decision of 10 March 2005, the BFH decided a significant case on the classification of a managing director's activities of a limited liability company (GmbH) for VAT purposes.

The remuneration of a managing director of a GmbH previously was considered employment income for VAT purposes and, therefore, not subject to VAT. If the managing director charged his/her salary, including VAT, to the company, the amount paid by the company was final because no deduction of input VAT was possible.

The BFH now overruled prior case law.

The activities of the managing director may be classified as independent activities for VAT purposes and, therefore, may give rise to VAT if the characteristics of his/her work contract lead to such a characterization;

for example, if the time, extent and place of work are at the discretion of the managing director.

Agreements relating to vacation entitlement, fringe benefits or the continuation of remuneration in the event of illness, however, might lead to a presumption that the activities are dependent activities (i.e. similar to activities of an employee), which are not subject to VAT. This change in the BFH's jurisprudence was initiated in 2003 with respect to the classification of the activities of a managing director of a civil law partnership and it now appears to be extended to limited liability corporations.

This change in case law should be taken into account by corporations that are not entitled to a deduction of input VAT because in such a case, the VAT at the level of the company becomes a final tax.

Source: Deloitte

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