Pay attorneys taxes

BFH on the tax liability of employed lawyers: Chamber contribution as wages?

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What does the taxable wages of employed lawyers count? Also the contributions for professional liability and the beA, if the employer pays them? Martin W. Huff explains two current BFH decisions that shed light on the darkness.

Every lawyer must have his or her own professional liability insurance, which includes certain minimum amounts of cover. However, many law firms are insured much higher. As a rule, they also pay the law firm's insurance premium for their employed lawyers. Mostly the same for the cost of setting up and running the special electronic lawyer mailbox (beA). The Federal Fiscal Court (BFH) has now decided when these payments are to be taxed by the individual lawyer as a pecuniary benefit.

More and more lawyers are employed, be it in law firms or companies. Their share in law firms should now be around 40 - 50 percent nationwide. Many employers then declare that they are willing to pay the contributions to professional liability insurance, the bar association, clubs and associations as well as the costs of the beA.

When auditing law firms, it is always disputed whether the expenses assumed for the employed lawyers represent a pecuniary benefit or operating expenses for the employer. In two recently published rulings, the BFH has issued an opinion on this and has made important distinctions in particular with regard to the premiums for professional liability insurance (ruling of October 1, 2020 - VI R 11/18 and 12/18).

Remuneration character?

Explanation: When assessing whether these costs borne by the employer are included in the wages subject to wage tax, it depends on whose essential interest the payment is. Wages within the meaning of Section 19 (1) of the Income Tax Act (EStG) are to be assumed if the employee receives something as an advantage "for" his work. For example, in order for it to be considered wages, the benefit granted must have the character of remuneration for the employee. If the costs are predominantly in the employer's interest, the benefit for the employee is negligible. These are then business expenses of the employer that are not subject to wage tax.

However, if the employer subjects the costs to wage tax (and then also has to pay social security contributions), the corresponding costs are deductible for the employed lawyer as income-related expenses in the context of his employment. If he is self-employed in addition to his salaried work, for example as a lawyer or as an author, then these costs represent business expenses.

The two proceedings before the BFH dealt with typical cases. The law firms concerned had assumed the costs of professional liability insurance, the chamber fee, the costs for the beA and the contribution to the local lawyers' association for their employed lawyers and did not regard these costs as taxable wages, but booked them as operating expenses of the law firm.

The tax authorities saw this differently during tax audits. The costs are to be taxed as a pecuniary benefit.

The law firms' actions against this had been dismissed by the tax courts. The revisions at the BFH now led to the annulment of the judgments and the referral back to the tax courts, at least with regard to the premiums for professional liability insurance. The VI. For the first time, the Senate of the BFH took a firm position on the question of when the premiums for professional liability insurance for an employed lawyer should be regarded as a benefit in kind. With regard to the other costs, however, the Munich court upheld the tax court decisions, according to which these are to be viewed as a pecuniary benefit for the employed lawyer.

Range of professional liability insurance

According to Section 51 of the Federal Lawyers' Act (BRAO), every lawyer must take out professional liability insurance to cover the liability risks for financial losses arising from professional activity. It is clear that, according to this professional regulation, every professional activity of the lawyer must be covered.

For the fulfillment of the insurance obligation according to § 51 BRAO it is irrelevant whether the individual lawyer or the law firm is insured. It only needs to be ensured that every lawyer working in the partnership enjoys full insurance cover, including for activities that are carried out outside the partnership.

However, most law firms insure themselves well above the minimum insurance sums of § 51 BRAO and also the sums that are provided for a partnership company, for example. The premiums for each individual lawyer can reach several thousand euros per year.

BFH differentiates according to the extent of liability

The BFH is therefore now making two differentiations: It differentiates between the premium for the minimum sum insured according to the BRAO and the additional insurance initiated by the law firm, and according to whether the employed lawyer is liable to the outside world for a legal breach of duty.

If he is externally liable for a breach of duty, if a mandate contract between the law firm and the client is included, then the full portion of the premium that is due to him is to be taken into account as a pecuniary benefit. Only if no liability is provided is the proportion of the premium for the minimum insurance according to the BRAO to be taken into account as a pecuniary benefit.

The BFH justifies these differentiations with the fact that if the law firm insures itself higher than necessary and the employed lawyer is not liable to the outside world, these costs are owed solely in the interests of the employer and are not required for the licensing as such for the employed lawyer. The costs for the minimum insurance that the law firm bears for the employed lawyer, on the other hand, are always to be regarded as a pecuniary advantage, since the admission as a lawyer is personal and not related to the activity, after all, he can also outside of the corresponding employment relationship, e.g. as an employee in several law firms Act.

As a rule, an employed lawyer who also appears for the partnership and for whom the partnership is not a GmbH, AG or partnership, the entire premium is therefore to be regarded as a pecuniary benefit. Only if there is no liability on the part of the employed lawyer is to be divided between the premium for the minimum insurance and the additional portion. Since in practice most of the employed lawyers are likely to be liable - at least as pseudo-associates - the portion of the premium attributable to them must be taken into account.

In the case on which the BFH is based, the tax courts now have to clarify how high the minimum premium was. As a rule, the insurance contracts do not distinguish between minimum premium and higher insurance and only show one premium. Under certain circumstances, the insurance company must now make a corresponding declaration.

Chamber contribution, beA and lawyers' association

If, in addition to the premium for professional liability, the employer also pays the chamber fee, the costs for the beA and even the membership fees for the lawyers' association, these are always pecuniary benefits that the lawyer in question has to pay tax on. The BFH thus confirms the tax authorities and the tax courts. That is understandable. After all, these costs are incurred by every licensed lawyer or, like membership in a lawyers' association, are not only in the interests of the employer.

Overall, the decisions of the BFH are in line with previous case law; the court only made the above-mentioned differentiations in the case of professional liability insurance.

Incidentally, the Munich court has not ruled on questions that could also arise for Syndici: Since they are only allowed to work for their employer, the costs assumed for liability, chamber contribution, etc. would probably not be regarded as a pecuniary benefit here.

Martin W. Huff is a lawyer in the LLR law firm in Cologne and managing director of the Cologne Bar Association