There has been intense discussion of whether the legal representatives of a GmbH, the German counterpart to limited liability companies, may be self-employed or if they have to be employed. The legal discussion on taxes has been considering whether the invoices of self-employed Geschäftsführer may qualify for input tax credits. §15 I no. 1 UStG reads: Invoices of other businesspersons for services or deliveries resulting from their business (meeting the complex rules on formalities) qualify for input tax credits. Input can be deducted from one's VAT debt. The BFH judged this question anew on March 10, 2005 (re V R 29/03).

The facts of the case on which the judgment was based concerned a GmbH whose purpose was to develop the patents of its sole representative A, who is also an employed university professor and self-employed expert and consultant. First, A worked free of charge for the GmbH and later as a freelancer following a contract between the two parties. For his activity as a Geschäftsführer he was free to determine if and when he would work for the GmbH, and he received a flat monthly payment. He expressly invoiced the GmbH with VAT and the GmbH deducted A's invoiced VAT for an input tax credit. The tax office argued that A was falsely designated as self-employed is only a dummy entrepreneur and thus does not qualify as a businessperson. The office therefore denied the input tax credit for the GmbH.

The tax court also argued in the first instance that A, as an organ of the company, could not qualify as a businessperson. Thus far, the Federal tax office has generally ruled that Geschäftsführer cannot be self-employed because they are bound by the directive of the shareholders (§37 I GmbHG). The Federal Tax Court abandoned this doctrine. The court now differentiates between the position as an organ of the company and the law governing this position. The installation and removal of a Geschäftsführer are legal actions of the shareholders regulated by law and the company's contract (comparable to the "articles" in Anglo-Saxon law), whereas hiring someone to act as an organ of the company can be based either on an employment relationship or an agency contract. Whether this engagement is really an employment relationship or freelance activity is to be determined following the usual rules. It depends on the facts of the individual case.

Published on the old CMS: 2007/2/16
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