Social media stars - the entrepreneurs and private clients of nextGen in tax law
Practice Tip Private Clients and Corporate Taxes
Anyone who is active on social media channels and earns money from them must not ignore tax consequences. It can be observed that the tax authorities are sending out a clear signal with the "online task force" that online activities should be checked and tracked more closely in the future. However, it overlooks the special features of social media activities and often arrives at incorrect tax results.
It is no longer a secret that social media stars such as influencers, YouTubers, bloggers and other digital advertisers can be very successful economically. Estimates conclude that influencers from Germany, Austria and Switzerland alone now generate net revenues of nearly one billion euros per year. They are often the entrepreneurs and private clients of the nextGen and build brands with economic relevance from their fame, as impressively demonstrated by the iced tea brand of a German rapper and influencer, for example.
However, from a tax perspective in particular, this "occupational group" is often entering uncharted territory, as there is no corresponding taxation regime for social media. Accordingly, the familiar mechanisms initially apply to the new field of activity and often take social media players by surprise. In addition, there are increasing messages that social media activities represent a new focus of examination in tax investigations. In this context, social media make it easy for the tax authorities: a "fake-account", with which activities can be tracked for the tax authorities without much effort, is quickly created. At the same time, the tax authorities are sending a clear signal with the "online task force" that online activities will be subject to greater scrutiny in the future. The instrument of the collective information request does the rest. Anyone who is active on social media channels and earns money with them should therefore not ignore the tax consequences in their entirety.
Income and trade tax
In a brochure dated 08.05.2020, the Bavarian State Tax Office (special unit of the tax supervisory authority "Online Taskforce") summarizes the most important tax basics for influencers. The cheerful look of this FAQ should not obscure the fact that the tax authorities take the activities of influencers seriously from a tax perspective. The worrisome core sentence of this questionnaire reads:
"If you are an influencer on a regular basis, then the IRS assumes you are earning income from a business."
However, whether YouTubers, influencers and bloggers are really advertising with their posts cannot be generalized and always remains a case-by-case decision. In particular, the tax authorities do not comment on when an activity with the intention of generating income really exists. The basic problem of the FAQ is that it is based on unknown legal concepts. In particular, there is no definition of the term "influencer" and no necessary delimitation of the different areas of activity. A generalization, as made by the tax authorities, neither leads to consistent results nor does it do justice to the virtual reality on the Internet. Finally, it should not be forgotten that the activity as an influencer is often only an extension of an already tax-relevant activity. However, the tax authorities do not explain where self-promotion ends and third-party promotion begins. However, it is undisputed that the activities of influencers can be subject to different types of tax, first and foremost income tax.
Classically, the following sources of influencer revenue in particular can be distinguished, which in turn have an impact on tax treatment:
Sponsored Content: Advertisers hire influencers to showcase their products or services on the influencer's social media channels.
Affiliate marketing: Within the scope of the above-mentioned product or service presentation, the Influencer refers to a page of the Advertiser and receives a (percentage) remuneration for each completed transaction made via the reference (link).
Advertising revenue from social media channels: Within the framework of an affiliate program of the social media platform (e.g. YouTube), the influencer receives, e.g. depending on his number of followers, a part of the advertising revenue of the advertisement that is placed in front of the influencer's content.
Appearance Fee: The influencer receives compensation (often related to sponsored content) for attending an event hosted by the advertiser.
Sale of own products: The sale of own products, e.g. merchandising articles, or product cooperations / own labels is also considered a possible source of income.
Consulting / conception for third parties in marketing issues: With their expertise in social media marketing, influencers also become consultants in some cases.
If the income belongs to a commercial enterprise, it is in principle also subject to trade tax. However, the tax authorities' brochure makes no mention of the fact that trade tax law provides for exceptions, for example in the case of artistic or freelance activities. In our experience, these exceptions often apply to classic influencers and testimonials.
In turn, taxable sales within the meaning of Section 1 UStG are subject to VAT. Influencer activities are regularly other services that an entrepreneur performs in Germany for payment as part of his or her business (Section 1 (1) No. 1 UStG). Pursuant to Section 2 (1) of the German Turnover Tax Act (UStG), a sustainable activity with the intention of generating income is sufficient for entrepreneurial status, which is regularly to be affirmed for influencers. Accordingly, the activities of an influencer in Germany against payment are regularly subject to VAT. If he does not make use of the small business regulation pursuant to Section 19 UStG, the Influencer must report VAT for his services.
The statements of the tax authorities on the question of whether free products or gifts are taxable are also so simplified that they must be disadvantageous for the potential taxpayer. The distinction between gifts in kind, which are related to an income tax-relevant activity, and mere gifts, which could at most be relevant under gift tax law, is missing.
In individual cases, it will also be necessary to ask whether the social media star is liable for tax in Germany at all. It is not uncommon for social media actors to live abroad, e.g. in Dubai. The letter from the tax authorities assumes from the outset that there is a tax liability in Germany. In our experience in advising influencers, bloggers and other players in the social media field, corresponding activities are mostly international, just like the web itself. Where is the client located, where is the influencer located and, above all, from where does he or she carry out his or her activities? The clarification of tax residency is therefore a compelling preliminary question.
(Not only) Those who act digitally also have a digital estate. Here, dark spots in civil law are indeed clearing up - if wills are also formulated with these special features in mind. But the tax consequences are still terra incognita. Is one's Instagram account an asset subject to inheritance tax? If so, what value does it have after the death of the social media star?
Recommendations for action
In three aspects, the financial management can be agreed with and its advice can be considered successful:
"German tax law is complex."
"Document, document, document!"
"Consult a tax advisor."
Social media players are private clients and entrepreneurs in one
Finally, it is worth pointing out another "classic" development in this context: Social media stars, like other entrepreneurs, often build up not inconsiderable assets that are broadly diversified. Like any entrepreneurial personality and any private client, they need advice on managing their assets and structuring them legally and fiscally.
Anyone who is active in social media, for example as an influencer or testimonial, therefore needs advice that appreciates all aspects of their individual case. In no other area are the transitions from a classic private client to an entrepreneur in his own right so fluid. In addition to purely tax-related advice, influencers need to take into account other special aspects, from documenting their activities and invoicing to safeguarding the assets they have created, which consist not only of money but also of digital assets.
The taxation of influencers is multi-faceted in terms of income tax and VAT. This applies in particular to cross-border cases and to the provision of products and services. Against the backdrop of increasing digitalization and the mobility of influencers, who are not tied to any particular location for their activities, influencers are well advised to be aware of the tax consequences of their activities. At the same time, companies that involve influencers in their advertising activities must ensure the correct tax treatment, this applies in particular to the deduction of withholding tax in accordance with Section 50a of the German Income Tax Act (EStG). Here in particular, a statement from the tax authorities would be very welcome. The pamphlet "I am an Influencer. Do I have to pay taxes?" was therefore hopefully only intended as an initial orientation.