Taxation of management shareholdings for advisory boards and consultants
In principle, proceeds from management equity investments are subject to taxation as capital assets and thus to the reduced tax rate of the final withholding tax and, in the case of equity investments of 1% or more, to the so-called partial income procedure. Under certain conditions, however, taxation at the normal income tax rate is also possible if the proceeds are attributed to the manager’s employment as income from employment. Compared to taxation as income from capital assets, this is associated with an additional tax burden of approx. 20% (top income tax rate 45% versus final withholding tax of 25%).
The question has not yet been clarified by case law as to whether, and if so under what conditions, advisory boards or consultants as investors in management holdings must also expect their proceeds to be included in income from self-employment as remuneration for activities pursuant to Section 18 of the German Income Tax Act (EStG). In the practice of tax audits, it is sometimes found that the tax authorities do not differentiate between managers and advisory boards in these cases.
Different conditions apply to the qualification of income from self-employment than to income from employment. Furthermore, income from employment is classified as surplus income, while income from self-employment is classified as profit income (Section 2 (2) EStG).
In the opinion of the Federal Fiscal Court, not every exchange of services with a de facto proximity to the employment relationship can automatically be assigned to income from employment. Rather, it must be examined in each individual case on the basis of all material circumstances whether the corresponding exchange of services is caused by the employment relationship or is to be allocated to another type of income or to the non-taxable area on the basis of an independent special legal relationship.
The BFH expressly qualifies an employee’s equity interest in his employer as such an independent special legal relationship.1 If the employee uses his or her capital to participate in the employer’s company, this is in principle a source of income that is independent of and separate from the employment relationship.
Advisory boards and consultants support the private equity investor in the further development of the target company. They have industry know-how and often also operational experience as managing directors or board members. As a rule, advisory boards and consultants do not perform any operational tasks, unless they step in as interim managing directors on an exceptional basis.
-> You can find Dr. Barbara Koch-Schulte’s detailed author contribution on this topic in the new FYB 2019 issue! — You can also download the article individually in our FYB store.