Taking tax risks seriously: Why marketers need to be careful
We have looked into the tax implications of participating in an MLM company and obtained expert assessments from international lawyers. One thing is certain: if the relevant tax office classifies an economic activity as a hobby, this often has serious consequences. Anyone who thinks this is just a formality or only affects hobby entrepreneurs is sorely mistaken. An incorrect assessment can not only negate tax advantages, but even lead to substantial claims for repayment.
What do the tax authorities mean by hobby?
Hobby is when an activity is not carried out with the intention of making a profit in the long term, according to the tax office. In such cases, the tax office assesses whether the activity is a serious commercial enterprise or more of a private hobby. The consequences are drastic:
- No tax recognition of losses: Losses may not be offset against other income.
- No VAT refund: Input tax amounts will no longer be refunded.
- No tax benefits: Operating expenses or income-related expenses are not deductible.
- Possible claims for repayment: losses that have already been recognised can be subsequently disallowed.
When is an activity classified as a hobby?
The tax office checks several criteria to determine whether an activity can be classified as a hobby:
- Persistent losses: companies that only report losses over a period of years are suspect.
- Lack of intention to make a profit: If there is no plausible concept for sustainable profitability, the tax authorities will be suspicious.
- Profitability customary in the industry: In profit-oriented industries, loss-making companies are subject to stricter scrutiny.
- Leisure or hobby character: Companies that seem more like an expensive hobby.
Hobby in the context of pyramid schemes and MLM models
The risk of being categorised as a hobby activity is particularly high in the area of questionable multi-level marketing (MLM) structures or even pyramid schemes:
- Lack of sustainable intention to make a profit: Only a few participants achieve real profits, while the majority make losses.
- Untenable business model: If income primarily comes from recruiting new members, there is a lack of economic substance.
- Permanent losses: anyone who runs up losses year after year without making any adjustments to their business can hardly claim to be running a business.
The tax consequences are considerable: not only are losses not recognised, but tax breaks that have already been granted may be reclaimed retroactively.
- The original activity remains crucial: damage control does not automatically turn an uneconomical activity into a legitimate business.
- Recoveries are not tax-relevant income: in most cases, they are considered private damages.
- Entrepreneurial vs. private decision: anyone who has privately invested in a fraudulent system cannot invoke tax rules for companies.
The only way out is if it can be proven that the activity was carried out from an economic point of view and that there was a genuine intention to make a profit.
Is hobbyism a cross-border problem?
The tax treatment of hobbies is similar in many European countries:
- Germany: losses over several years → suspicion of hobby in accordance with § 15 para. 2 EStG.
- Austria: clear guidelines for distinguishing between tax-relevant activity and hobby.
- Switzerland: distinction between private asset management and commercial activity.
- France, Spain, the Netherlands: Comparable principles: No tax recognition without a recognisable profit concept.
Particularly explosive: In all countries, snowball systems are considered fraudulent and economically nonsensical. There are generally no tax advantages here.
Conclusion: Hobbies are not a harmless tax problem
Those who do not seriously pursue their business activities economically risk not only tax disadvantages but also substantial claims for repayment of tax. Particularly in the area of unsafe investments or MLM models, classification as a hobby can lead to financial disaster.
The most important rule is therefore:
- A comprehensible business concept with a recognisable intention to make a profit.
- Professional company management with clear cost and sales management.
- Tax advice in advance to identify risks early on.
Because anyone who takes the topic of hobby too lightly could end up paying dearly for it.
Image sources: ZDF, Lindt
Note: And as always, those affected are welcome to comment on this, or if someone has more or different information, they are welcome to share it with us. We are not interested in making false claims and our primary goal remains the provision of complete documentation.
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