“Influencer” – A new force in marketing – and German tax obligations resulting from it

In the advertising industry, “influencers” have become a decisive factor. To sell their products and services, companies are always looking for new opportunities, and often use people who do not only market themselves but also the company’s services.

While, in the past, celebrities were used to this end; there is now an increasing trend to replace them with persons who have a large following because of their significant presence in the social media – so-called “influencers”. In part, this rise of the influencers is seen as a “trivialisation of the profession”.
However, the fact needs to be considered that there can also be tax obligations for these “internet stars”.

Background: Tax responsibilities for influencers

A passion for blogging on Facebook, Twitter, Instagram, YouTube and so on is usually the most important motivation for people who are opinion leaders and “multipliers” on the social web because of their reach, reputation or status as a perceived expert. However, these activities do not only result in public attention –they also draw the attention of the fiscal authorities. And this has tax consequences which have to be considered in more detail, in particular, with regard to:

• income tax,
• sales tax and
• trade tax.

In practice, this means: The influencers’ income is subject to various tax obligations.

If, as an influencer, you do not only have a presence in the social media but also receive money for this (from companies), you generate taxable income as a result. The question of whether taxes are incurred with regard to this, depends on the individual tax laws. According to art. 35 EStG [German Income Tax Act], an obligation to submit a tax return arises as soon as income is generated from the activity as an influencer. However, only those influencers whose income (i.e. revenue less expenses) exceeds the annual tax allowance (2017: EUR 8,820.00, art. 32a EstG) are liable to actually pay tax. Moreover, different principles apply to sales tax. Below, we outline those tax liability areas which a “successful” influencer faces sooner or later.

I. Income tax consequences for influencers
Initially, in accordance with trade law, work as an influencer needs to be reported to the relevant chamber of trade. This is usually the competent chamber whose area includes your home address. In accordance with art. 2 section 1 no. 2 EstG, income from commercial operations are subject to income tax. According to art. 15 para. 2 sentence 1 EstG, a commercial operation includes every independent and sustainable operation undertaken with the aim of generating a profit and constituting participation in the general economic transactions (…). As a rule, activity as an influencer fulfils these preconditions, as a result of which the income generated as an influencer is of a commercial nature. The mere initiation of these activities is already sufficient for the fulfilment of this income tax requirement.

Freelance status, on the other hand, does not apply in the case of the influencer. Even though this activity, as a rule, also involves artistic presentations of products and services, tax law usually disregards this artistic component in the case of advertising jobs and jobs resembling such and, for this reason, regards such as being purely commercial.

Under income tax law, we differentiate between net income types (income from agriculture and forestry, from business enterprises and self-employed work) according to art. 2 section 2 no. 1 EStG with regard to the calculation method as follows:

• As in the case of other business people, the profit of influencers is determined as the surplus of operating revenue over and above operating expenses according to art. 4 section 3 EStG (cash-based accounting) in principle.

• The operating assets comparison according to art. 4 sections 1 and 5 sub-section 1 EStG has to be applied by taxpayers who are obliged to keep books and to prepare regular annual financial statements according to trade or tax law (art. 140, 141 AO) or who do this on a voluntary basis (farmers and foresters, self-employed persons, non-merchants according to art. 4 section 1 EStG, merchants according to art. 5 section 1 EStG).

Summary of the income tax obligations for influencers:
1. In principle, there is an obligation to submit a tax return (preparation of an annual income tax return).
2. If the annual tax allowance (see above) is exceeded, taxes have to be paid.
3. The profit has to be determined using the so-called cash-based method of accounting.

 

II. Sales tax consequences for influencers
The income generated as an influencer is, in principal, subject to sales tax. As self-employed persons, influencers are entrepreneurs within the meaning of art. 2 UStG [German Sales Tax Act]. In as far as sales generated from these activities did not exceed a limit of EUR 17,500.00 in the past calendar year and will in all likelihood not exceed a total of EUR 50,000.00 in the current calendar year (forecast decision at the beginning of the financial year), the provision regarding small enterprises according to art. 19 section 1 sentence 2 UStG can be used. This includes simplifications as to invoicing with regard to tax declaration obligations which are then considered fulfilled upon the submission of the annual sales tax return. If these sales thresholds are exceeded or if the small entrepreneur provision is not used, monthly input tax declarations have to be submitted. These include a declaration of the monthly sales.

As a result, the influencer becomes an entrepreneur within the meaning of art. 2 Sales Tax Act upon the commencement of his/her commercial activity. A statutory tax rate of, at present, 19% applies to those sales. If, as an entrepreneur (according to the applicable rules), the influencer wishes to charge a fee of EUR 1,000.00, he/she needs to show the sales of EUR 1,000.00 and the relevant sales tax of EUR 190.00, i.e. a total of EUR 1,190.00, in the invoice. Moreover, many important characteristics have to be considered in invoicing (cf. art. 14 UStG).

In principle, the influencer as an entrepreneur (according to the applicable rules) can claim back the sales tax charged on inputs (deliveries/services) by way of input tax deduction from the tax office, art. 15 UStG. In this case, the sales must have been effected nationally to his or her company and there must be a proper invoice regarding this.

Summary of the sales tax obligations for influencers:
1. As of the first euro in sales, there is an obligation to submit a monthly tax return.
2. Proper invoices regarding the sales have to be prepared.
3. In as far as the sales thresholds of art. 19 UStG (see above) are not exceeded (provision regarding small enterprises), simplification rules apply to invoicing and the sales tax return.
4. If you operate as an entrepreneur (according to the applicable rules), you can deduct the sales tax for incoming invoices as input tax.

 

III. Trade tax consequences for influencers
An entrepreneur who operates a trade (such as the influencers) is also subject to trade tax in principle, cf. Art. 5 section 1 sentence 3 GewStG [German Trade Tax Law]. With regard to trade tax, influencers also have an annual allowance of, at present, EUR 24,500.00 according to art. 11 section 1 no. 1 GewStG. This means, in practice, trade tax is only incurred for work as an influencer if the profit exceeds EUR 24,500.00. Regardless of the amount of the profit, however, a trade tax return has to be submitted.

The amount of the trade tax depends on the assessment rate of the administrative area in which the influencer has registered his or her business. If the profit, e.g., amounts to EUR 34,500.0, the annual allowance of EUR 24,500.00 is deducted from this and an amount of EUR 10,000.00 remains. An amount of 3.5% thereof (i.e. EUR 350,00) has to be multiplied with the assessment rate of the respective administrative area (e.g. 400%). This means, in our example, the trade tax calculated is EUR 1,400.00.

Summary of the trade tax obligations for influencers:
1. In principle, income as an influencer is subject to trade tax.
2. An annual trade tax return has to be submitted.
3. At present, there is an annual allowance of EUR 24,500.00.
4. The respective assessment rate of the administrative area is decisive for the trade tax amount.

 

IV. Tax evasion through misconduct by influencers
A “successful” influencer who does not comply with one of the obligations outlined above by failing to submit, e.g., income and sales tax declarations or by not fulfilling the other (tax) obligations listed risks a fine or a prison term on grounds of tax evasion, as well as penalty interest payments.

In principle, the fiscal damage incurred and the question of whether the influencer acted through negligence or with premeditation is decisive in this context.

Art. 370 AO [German Tax Code] (Tax evasion) provides for a broader range of sentences which might entail a fine (as is more common) or, under certain circumstances, a prison term.
The following financial consequences might apply:

• Subsequent payment of the taxes evaded,
• Payment of interest on the taxes evaded, art. 235 AO,
• Forfeiture, section 73 et seq. StGB [German Criminal Code],
• Confiscation, section 74 et seq. StGB.

We would like to point out that the influencer can avoid punishment on grounds of tax evasion by submitting a voluntary/subsequent self-disclosure. However, in order to ensure immunity from prosecution, the various preconditions included in art. 371 AO have to be strictly complied with. We are pleased to help you avoid sources of errors and risks which are entailed in a subsequent self-disclosure or a voluntary self-disclosure made in order to avoid punishment.

Comment by the lawyers and tax advisers from LHP Luxem Heuel Prowatke in Cologne:
We, LHP attorneys at law/tax advisers/tax lawyers, are pleased to help influencers in living their passion and cooperating with companies, while complying with the strict tax obligations.
If the tax office finds out that deadlines for tax returns are missed or even that taxes on income from such activities are not paid, this will result in many negative consequences. In this case, the taxes have to be paid plus interest in any case, while, moreover, criminal tax proceedings might even be initiated. Ignorance is no defence in these matters.