The Court of Justice of the European Union (CJEU), on 21 December 2023, issued its decision on the value added tax status of independent directors in TP vs. Administration de l’enregistrement, des domaines et de la TVA (C-288/22).
After considering the opinion of Advocate General Kokott, the CJEU concluded that while a director in the specific circumstances of the case would be regarded as engaging in an economic activity, they would not be deemed to act independently. This conclusion is mainly reached because there was a director’s lack of personal assumption of risk in its board position. Consequently, the CJEU’s decision implies that such a director would not qualify as a taxable person 1 (TP) and VAT would not be applicable to the remuneration paid by the company.
This decision contrasts sharply with the Luxembourg VAT authorities’ (hereinafter LVA) position regarding VAT. According to Circular No. 781, issued on September 30, 2016, they consider that the activity of a board member has an economic nature in relation to the delivery of services. Hence, such board members fall under the definition of “taxable person” under Luxembourg VAT Law which triggers the application of a 17% VAT rate on directors’ fees paid by the company.
With this decision there are few doubts that the impact will be wide-ranging, and not only for board directors.
Background
TP is a lawyer and member of the board of directors of several public limited companies (i.e. a bank and several holding companies listed on various stock exchanges) incorporated under Luxembourg law and carries out several assignments in that regard. In this case in particular, TP was appointed for a period of six years and his remuneration was decided upon by the general meeting of the shareholders of the Luxembourg public limited company. He was issued a tax assessment by the LVA, which determined that the directors’ fees he received in 2019 were liable to Luxembourg VAT. Subsequently, he filed an appeal against this assessment.
In response to the appeal lodged by TP, the LVA upheld its stance, asserting that independent board members are to be regarded as supplying services within the scope of VAT to the company on the board of which they are sitting, irrespective of whether the person receiving the remuneration is a company or a private individual. Consequently, director fees are typically subject to VAT in Luxembourg, with a few exceptions for investment funds and other honorary activities amongst others. However, this VAT treatment is different in several other EU countries.
In January 2021, TP filed an annulment appeal before the Luxembourg district court. The TP contended that the compensation received as a board member should not be liable to VAT, claiming that his actions were not carried independently, but rather as part of a collegiate body representing the corporate legal person. According to the TP the service rendered by the board should be considered as provided by the company itself.
The Luxembourg district court decided to suspend the proceedings, considering that no similar situation has been submitted to the CJEU in the past and requested the CJEU to issue its preliminary ruling on this matter, in particular, the following questions:
1) is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out an “economic” activity and more specifically, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?
2) is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out his or her activity “independently”, within the meaning of the EU VAT Directive?
In July 2023, Advocate General Kokott’s opinion was that “the existence of an independent economic activity must be determined by means of a typological comparison. The decisive factor in that regard is whether, in the context of the necessary overall assessment, the person concerned, as a typical taxable person does, bears an economic risk personally and acts on his own economic initiative, which it is for the referring court to ascertain. In that regard, it follows from the principle of neutrality of legal form that a natural person who is a member of a body of a company which is required by law and who receives remuneration for that activity as a member of that body cannot in this respect be regarded as carrying out an independent economic activity“.
CJEU position
In December 2023, the CJEU issued its decision in this case. As an initial observation, the CJEU addressed the circumstances of the case and consequently omitted from its examination a scenario in which the director: i) would have a casting vote within the boards of the public limited companies of which he was a member ii) would assume the representation or daily management of the affairs of these companies and/or iii) was part of a management committee in these companies.
Having that in mind and to conclude on the VAT treatment applicable to directors’ fees, the CJEU considers that it is necessary to assess the situation on a two-step approach:
i) Is the director performing an economic activity?
ii) If yes, is this economic activity carried out independently?
In the first step, the CJEU specified that an economic activity should be acknowledged if the director receives a predictable compensation for his services with a certain degree of permanence.
The CJEU emphasized that the possibility of revoking the director’s mandate without cause was inconsequential if the mandate already had a predetermined duration (as was the case here, with a maximum of 6 years).
Furthermore, the CJEU recognised that, as in the present case, it is customary for directors’ fees to be contingent upon the company generating profits. The defendant argued that this condition rendered the compensation uncertain and unpredictable. However, the CJEU ruled that an economic activity would still be identified if the shareholders’ general meeting could assign remuneration to the board directors, even if the company was not profitable. The court also clarified that a predetermined lump-sum remuneration would not change this conclusion.
Therefore, although each director’s circumstances may vary, it is probable that the criteria for the first step will generally be satisfied in practice. Nonetheless, this determination should be made on a case-by-case basis.
In the second step, the CJEU listed several criteria to ascertain whether the director was effectively acting independently, aligning with the advocate general’s reasoning. Essentially, the decisive factor is whether the director personally assumes an economic risk due to the mandate received (i.e. he bears a risk of loss and profit personally).
The court emphasized that in the context of a public limited company, the director does not take individual responsibility for any risk. Instead, it is the corporate body (as a whole) that assumes liability under corporate law, rather than the individual members. The court stressed that this is even more true if the shareholders’ general meeting has consented to remunerate the director even when the company is experiencing losses. The decision explains that “despite the fact that that member is free to arrange how he or she performs their work, receives the emoluments making up his or her income, acts in his or her own name and is not subject to an employer-employee relationship – he or she does not act on their own behalf or under their own responsibility and does not bear the economic risk linked to their activity”.
The CJEU determined that the essence of a board director’s position is intrinsically linked to the collective operation and representation of the company, rather than being an autonomous endeavour. Consequently, despite the permanence and remuneration associated with their roles, board directors fail to meet the independence standard necessary for VAT liability, thus exempting their activities from VAT.
Main conclusions
This decision is important since VAT has traditionally been levied on directors’ fees in Luxembourg. The LVA have stated that once the Luxembourg district court lifts the suspension on proceedings and renders its verdict – considering the CJEU decision – they will ensure the regularisation of Luxembourg VAT previously remitted by directors within the statute of limitation period (i.e. 5 years starting on 1st January of the year following the tax period), thereby refunding any overpaid VAT. Exceptionally, the LVA have decided to waive the application of the statute of limitation for the 2018 tax year – since the CJEU decision was not handed down until 21 December 2023.
There are also pending questions regarding the VAT treatment applicable to fees paid to non-resident directors (and notably regarding the impact on the reverse charge mechanism).
Additionally, the LVA stated that a comprehensive circular will be issued soon.
More importantly, the CJEU is redefining the “independence” criteria by considering factors such as personal liability and economic risks taken, rather than solely focusing on the absence of a subordinate relationship. The outcomes of this judgment will undoubtedly extend far beyond, significantly influencing the accurate application of VAT regulations in situations where adherence to the independence criterion was previously assumed.
[1] A taxable person is considered as “any person who, independently and on a regular basis, in the course of a general economic activity, carries out transactions, whatever the purpose, results or place of that activity”
Nuno Raposo Jacinto
April 2024