The shift to digitalisation has changed the marketing approach. In addition to advertising in print media, via placards and in classic video media (such as television and cinema), the Internet has become extremely important as an advertising platform in recent years across all sectors of the economy. As early as 2018, global investments in online advertising amounted to USD 261 billion with a significant growth trend.
Internet advertising has benefits particularly in terms of its wide reach and diverse creative possibilities. Advertising on the Internet features, on the one hand, traditional advertising in a new shape, such as commerical spots, pop-up and banner advertisements on homepages, in apps and advertising emails, and, on the other hand, new advertising formats, such as search engine advertising and, in particular, also personalised advertising, known as “influencer marketing”.
Influencers are popular, well-connected multipliers that use their personal popularity to deliver promotional messages. They reach a large group of Internet users through their profiles and channels on social media platforms such as Instagram, Facebook, LinkedIn, YouTube, Twitter, Twitch and TikTok. They also often use their popularity to promote events.
The advantages of working with influencers are, in particular, the authenticity of the promotional message, the link to the influencer’s unique online content and the improvement of communication with a specific target group.
Due to the reach of many influencers and the increasing importance of influencer marketing in the economy, the tax treatment of this industry has increasingly become the focus in recent months of the German tax authorities and social security - e.g. the German Artists’ Social Welfare Fund (Künstlersozialkasse, KSK).
In the summer of 2020, the BMF (Bundesministerium der Finanzen [German Federal Ministry of Finance]) issued an information sheet for influencers, titled “I am an influencer. Do I need to pay taxes?” Conversely, for business entities, there has been no public statement from the German tax authorities on the topic of influencer marketing up to now.
This is why the question arises: What should business entities keep an eye on?
For business entities that engage influencers for advertising purposes, this publication provides important information. For example, the German tax authorities explicitly point out that they will submit requests for information to the business partners of influencers. These requests must be actioned by business entities in accordance with Section 90 of the German Tax Code (Abgabenordnung, AO). Therefore, it makes sense to be prepared, i.e. properly documenting business relationships and promotional activities.
Of course, consistent handling of tax issues within the business entity is very important.
Income tax topics
It is common for business entities to distribute promotional gifts, product samples, and test products to influencers free of charge. Often, trips or events in Germany and abroad are also arranged and services within this context are offered to bloggers free of charge or at a discount.
Free mobile phones, make-up or overnight hotel stays – anything an influencer receives in exchange for (or in the expectation of) advertising services is generally not a tax-free gift, but a benefit in kind subject to income tax within the meaning of Section 8 para. 2 EStG.
However, the German tax authorities can question whether the promotional gifts and other expenses paid by the business entity are deductible operating expenses. Business entities should therefore know what the influencer has done with the offer. Was use made of the offer? Was the product or service advertised or not? Was there a photo, post, blog mention or affiliate link? Was the item retained or returned unaltered after the test was completed? All of this can have an impact on the tax treatment and should be documented.
In addition, we are noticing that the German tax authorities are tending to include product shipments within the scope of application of flat-rate taxation at 30% according to Section 37b EStG borne by the business entity. In this case, it is important to check whether the prerequisites actually exist and to ensure that all benefits in kind are applied consistently at the business entity. The value of the goods and the extent to which the respective influencer advertises the business entity can also be decisive for the tax treatment in this respect. For example, Section 37b para. 1 EStG may only be applied if the individual benefit in kind has a maximum value of EUR 10,000 - and only up to a total value of EUR 10,000 per influencer per year.
In case business entities work with an influencer based abroad, withholding tax obligations can arise in accordance with Section 50a EStG. The influencer might for example generate income from a performance that took place in Germany, or from the cross-border use of personal rights. In such case, the business entity is liable for declaring and paying the correct amount of withholding tax.
Influencers involved can at the same time be an employee of the business entity. It is not that rare for an influencer to draw inspiration for his online presence from his main profession. This can trigger employer obligations, such as the obligation to withhold wage tax and social security. There should therefore be a precise distinction between the influencer’s independent income or wages.
German Artists’ Social Welfare Fund
It is open to question as to whether influencers perform an activity that typically gives rise to tax/social insurance liability according to German Artist’s Social Insurance Act (Künstlersozialversicherungsgesetz, KSVG). In any case, the KSK expressly lists influencers in the list of artistic activities.
However, classification as an artistic activity does not necessarily lead to tax/social insurance liability. There are influencers who also owe their popularity to their activity as actors or musicians, for example. In these cases, do payments to influencers fully account for artistic/journalistic performance? Or are they not paid (at least partially) for the exploitation of name rights or against the background of the wide range of individual influencers? In these cases, it will depend on whether the influencer is responsible for his own performance or whether only his name is advertised.
In terms of VAT, the question arises in principle as to whether issuing promotional gifts, product samples or test products to influencers is (i) not taxable, (ii) occurs within the scope of a free benefit and is taxable accordingly, (iii) or is delivered for a consideration within the scope of an exchange of services. At the same time, it must be noted that the consideration may also be given in the form of another service, e.g. an advertising service. In the next step, this initial classification affects which tax base is deemed applicable as well as the correct tax to be invoiced and paid. Detailed knowledge of the contractual relationship and the actual arrangement is crucial for the accurate VAT classification.
If there is an exchange of services, business entities should also keep an eye on the influencer’s tax circumstances and check whether the notification of VAT charged on the influencer’s invoice is correct: What service is delivered by the influencer? Is the service delivered electronically? Is the service provided domestically or abroad? Is the influencer providing the service a small-scale entrepreneur? In order to minimise risks in connection with the input tax deduction from influencer invoices, settlement via VAT credit may be useful.
The legal framework conditions should also be clarified: Do you want to conclude contracts with influencers? Or should product samples be sent to a selected group of people without a contract? What promotional activities ensue from this, and who documents them?
In particular, the issue of identifying influencer contributions as advertising has been a matter for the German courts for several years. In the absence of relevant laws that explicitly regulate influencer advertising, the identification requirement is governed by the more or less well-suited provisions of the German Act against Unfair Competition (Gesetz gegen unlauteren Wettbewerb, UWG), the German Telemedia Act, the German Interstate Broadcasting Agreement and/or the German Interstate Agreement on the Protection of Minors in the Media. The provisions that apply depend on the type of publication used (video, image/text or plain text) and the platform used (e.g. YouTube, Instagram or blog). In order to help influencers and their clients understand the identification requirement following from the multitude of provisions in question, the media institutions have published a guideline for advertising identification in social media (available at https://www.die-medienanstalten.de). The identification matrix roughly illustrates whether and how a contribution must be identified as an advertisement. Since this is by definition a highly simplified and abstract representation of the complex regulatory structure, the outcome from this matrix is frequently that the contribution must be identified as advertising.
However, our consulting experience shows that the circumstances of the individual case render the identification obligation inapplicable. This is because whether an influencer's contribution must be identified as advertising or not depends on the specific form of the contribution.
Influencers and business entities may be able to take advantage of the significant benefits of influencer marketing with legal certainty under some circumstances without exposing themselves to the risk of warning notices under competition law or fines from the authorities.
Recommendations for practicable action
The influencer marketing arrangement can be very complex and innovative. In these cases, in order to ensure appropriate tax treatment from the outset and to avoid any unforseen costs, it is crucial that the tax department or the tax adviser is already involved and consulted during the design phase.
Since there is little relevant tax case law and few relevant administrative instructions in the still quite new area of influencer marketing, it is important for business entities to document the selected tax approach well. If necessary, it may be advisable to seek agreement with the German tax authorities in advance.
Your direct contacts at KPMG AG Wirtschaftsprüfungsgesellschaft are available at any time for questions.
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Dr. Anne Schäfer
KPMG AG Wirtschaftsprüfungsgesellschaft
Partner, International Transaction Tax
KPMG AG Wirtschaftsprüfungsgesellschaft
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