The Advocate General opines against the VAT taxation of company directors’ fees

On 13 July 2023, Advocate General Kokott delivered her opinion following a request for a preliminary ruling (Case C-288/22) from the Luxembourg lower administrative court dealing with the VAT treatment of the remuneration received by a natural person for his activity as a member of a board of directors of a Luxembourg public limited company.

The Advocate General concludes 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..

Furthermore, in her view, for the sake of VAT neutrality (which prevents competition distortion between taxable persons), the remuneration paid for the activities of a member of a company’s body which is required by law cannot be subject to VAT.

Background of the case

A Luxembourg lawyer, referred to as TP, is a member of the board of directors of several Luxembourg public limited companies for which he receives remuneration in the form of percentage fees (“tantièmes”). In his tax return, he decides not to apply VAT on it considering that a director is not a taxable person for VAT purposes as his activity is not carried out independently. Indeed, according to TP:

  • A director of a company is a member of a collegiate body which represents the legal person and therefore, the service provided collectively is deemed to be provided by the company itself (as a matter of fact, the position of an individual member of the board may be diametrically opposed to that of the collegiate body);
  • It follows from the Law on commercial companies (Article 441-8) that a member of the board of directors can be not personally liable in relation to the commitments of the company (except where that member manifestly exceeds the limits of acceptable conduct but in such case, the wrongful act would be severable from his related function).

The Luxembourg VAT authorities (Administration de l’enregistrement, des domaines et de la TVA) subjected the said remuneration to VAT through a reassessment on the ground that a member of the board of directors of a company carries out an independent economic activity since it is permanent and gives rise to remuneration for the activity carried out. This approach was in line with their Circular No 781 issued on 30 September 2016 confirming that directors of a company are VAT-able persons.

TP brought an action against the tax notice requesting it to be annulled before the Luxembourg Lower Administrative Court (Tribunal administratif). The latter decided to stay the proceedings and referred the following two questions to the Court of Justice of the European Union (« CJEU ») for a preliminary ruling under Article 267 TFEU:

(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 within the meaning of Article 9 of the VAT Directive 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 Articles 9 and 10 of the VAT Directive?

The Advocate General’s opinion

According to the Advocate General, what matters is actually the existence of an economic activity that is carried out in an independent manner.

In order to determine whether such criteria are met, the Advocate General suggests taking the typological approach that leads to an assessment on a case-by-case basis, in reference to the typical conduct of an active entrepreneur in the field concerned. In this respect, she recalled that such an approach underpinned the CJEU decision in the IO case1 regarding the independent economic activity of a member of a supervisory board of an incorporated company who received remuneration for his work. In this case, the CJEU compared that activity with that of a typical taxable person and, in light of the specific facts under review (remuneration which was not dependent on participation in meetings or workload, no economic risk, small and fixed lump sum), stated that it could not be considered as an economic activity.

Under such method, the Advocate General noted that the typical activity of an independent taxable person is characterized mainly by the fact that he bears his own economic risk and he acts on his own economic initiative (e.g. in terms of the determination of his remuneration and the possibility of offering his services on the free market to other third parties). In that regard, the Advocate General is of the view that TP probably cannot be compared to a taxable person who typically carries out an independent economic activity for the following reasons:

  • TP does not receive remuneration for his own activities (for example as a mandated lawyer who then also assumes corresponding liability if his advice was incorrect), but as part of a collective body. As such, he is not personally liable, but only the body to which he belongs is, as is clear from Article 441-8 of the Law on commercial companies.
  • TP’s activities as part of a board of directors cannot be carried out on the free market to other third parties but can only benefit the company for which he was appointed as director.
  • TP’s activities are limited by company law which confers on the board or its members certain rights and obligations in relation to the company.
  • TP’s level of remuneration was not dictated by the workload involved nor determined by negotiation with the recipient of the service (as would be the case for a typical business) but was determined unilaterally by the general meeting. As the CJEU has already pointed out, the fact that a natural person is dependent on the company to determine his remuneration is an indicator that he does not carry out an independent economic activity. The Advocate General also made it clear that it would make no difference if TP had received variable remuneration based on the company’s performance, because ultimately, he would participate in the same way as a shareholder in the success of the company, or be in the same situation as an employee who, in addition to his fixed salary, receives variable remuneration based on the employer’s performance. This is also true if TP had received performance-related remuneration as eventually, he does not have to bear losses or other risks, unlike a typical business person.

Aside from the typological approach, the Advocate General raised another argument to support the view that a member of a board of a company cannot be a taxable person for VAT purposes. She highlighted that the law does not require all legal forms of company to have a board. Taxable persons for whom such a body is not required by law (e.g. a traditional sole trader) do not have to bear that VAT burden. This results “in a disadvantage of specific legal forms, which are in competition with the other forms if and because they provide identical services”. Yet, the principle of fiscal neutrality precludes economic operators who effect the same transactions being treated differently in respect of the levying of VAT. For this reason, the remuneration paid by a taxable person for the activities of the body of a company which is required by law cannot be subject to VAT.

What’s next?

As pointed out by the Advocate General, the VAT treatment of the remuneration of company directors is not aligned in the EU. To date, while the majority exempts them from VAT, six Member States, including Luxembourg, view them as VAT taxable persons. Thus, overall, the CJEU ruling would ensure a unified VAT treatment in the EU in that respect.

As far as Luxembourg is concerned, if the CJEU follows the Advocate General’s opinion, Luxembourg VAT authorities would have to review their position to be compliant with the CJEU and treat a director as a non-taxable person for VAT purposes.

Directors would no longer need to charge VAT. As a corollary, the VAT incurred by the director on related costs would no longer be deductible. Directors established in Luxembourg would stop complying with VAT filing obligations and would therefore have to deregister for VAT purposes.

As for the recipients of services, companies with no or partial VAT deduction rights will no longer have to bear any definitive VAT costs related to the incurred directors’ fee expenses.

With regard to past activities, for those who have applied the aforementioned Circular No 781, regularisations should be considered.

It is worth noting that directors of investment funds covered in Article 44.1.d of the Luxembourg VAT law should not be impacted by the CJEU decision (whatever the outcome) since their management services are already exempt from VAT.

It remains to be seen if the CJEU will follow its Advocate General’s opinion (which happens frequently). The CJEU ruling is expected before the end of the year.

1 CJEU, C‑420/18, IO, 13 June 2019