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TAX & BUSINESS
Municipal tax liability for substantially involved shareholder‑managing directors
For fees paid to a substantially involved shareholder‑managing director of a GmbH, the company must pay municipal tax even if the director outsources his services to his sole proprietorship and invoices the company under a work contract.
The Federal Fiscal Court (Bundesfinanzgericht, BFG) clarified that municipal tax liability also applies to substantially involved shareholder‑managing directors, when all other characteristics of an employment relationship are met. This particularly includes subordination and organisational integration into the GmbH’s operations. In the case of a shareholder‑managing director with a decisive influence on the company (shareholding of more than 25%), subordination is not a criterion for an employment relationship, as such directors are generally not subordinate. However, the long‑standing activity of the shareholder‑managing director for the GmbH is a clear indication of integration into the business organism of the operation.
The decisive factor is solely the organisational integration into the company’s operational workflow. According to the BFG, a separate entrepreneurial structure of the sole proprietorship does not preclude a municipal‑tax‑liable service relationship with the GmbH.
Entrepreneurial risk
The BFG also commented on the issue of entrepreneurial risk in a case. While the work contract provided for a performance‑based remuneration, payment was excluded in the event of a negative contribution margin. A negative contribution margin never occurred in the relevant years. Moreover, the shareholder‑managing director, as majority owner, could have altered the contract terms at any time. Consequently, there was no actual entrepreneurial risk for the director as a sole trader.
Furthermore, the assessment base for municipal tax may not be reduced by general operating expenses or fixed costs of the sole proprietorship. Only costs for the director’s own staff could lower the assessment base, and in the present case there were no employees in the sole proprietorship.
Conclusion
The judgment fits seamlessly into the case law of the Administrative Court (Verwaltungsgerichtshof), according to which municipal tax is determined not by the external contractual form but by the actual circumstances such as integration into the business. The intermediation of a sole proprietorship should not alter this outcome. Outsourcing the shareholder‑managing director’s activities for the company to his sole proprietorship must not enable the company to evade municipal tax liability.
The decisive factor is solely the organisational integration into the company’s operational workflow. According to the BFG, a separate entrepreneurial structure of the sole proprietorship does not preclude a municipal‑tax‑liable service relationship with the GmbH.
Entrepreneurial risk
The BFG also commented on the issue of entrepreneurial risk in a case. While the work contract provided for a performance‑based remuneration, payment was excluded in the event of a negative contribution margin. A negative contribution margin never occurred in the relevant years. Moreover, the shareholder‑managing director, as majority owner, could have altered the contract terms at any time. Consequently, there was no actual entrepreneurial risk for the director as a sole trader.
Furthermore, the assessment base for municipal tax may not be reduced by general operating expenses or fixed costs of the sole proprietorship. Only costs for the director’s own staff could lower the assessment base, and in the present case there were no employees in the sole proprietorship.
Conclusion
The judgment fits seamlessly into the case law of the Administrative Court (Verwaltungsgerichtshof), according to which municipal tax is determined not by the external contractual form but by the actual circumstances such as integration into the business. The intermediation of a sole proprietorship should not alter this outcome. Outsourcing the shareholder‑managing director’s activities for the company to his sole proprietorship must not enable the company to evade municipal tax liability.