The case involved TP, a lawyer and member of the board of directors of several Luxembourg public limited companies. In his role as member of the board, he made decisions relating to the accounts, the risk management policy and the overall strategy to be followed by the group.
It should be noted that there is no EU-wide consensus on the VAT treatment of directors’ fees and while the Luxembourg VAT authorities (AEDT) have made their stance clear in Circular n°781, which explicitly recognises the activity of independent directors as being subject to VAT, some Member States have taken the opposite approach.
In the case in question, TP took the view that he was not carrying out his activity independently and his remuneration was thus not subject to VAT. The AEDT disagreed with TP’s approach and decided that the directors’ fees received by TP were subject to VAT.
TP essentially relied on the independence criterion which, in his view, was not met. TP notably referred to the ruling in IO (C-420/18) and claimed that directors generally do not bear any economic risks associated with their position. Furthermore, TP submitted that the board of directors takes decisions as a collective body and not as individual members.
The AEDT considered that TP provided management services in the context of his activity as a member of the board. It further considered that the services provided by TP were for the direct purpose of obtaining the remuneration voted by the shareholders and that there was a clear legal relationship between the services provided and the value received in exchange. Finally, the AEDT argued that the directors were acting independently, based primarily on:
- The working conditions of the directors in which they organise and procure independently the staff and equipment necessary for their activity.
- Their remuneration, which is based at least partly on the success of the business.
- The existence of civil liability of directors vis-à-vis the company and tax liability vis-à-vis the authorities.
Opinion of Advocate General Kokott
In her examination of the case, AG Kokott considered that the key condition for determining whether members of a company’s board of directors are carrying out an economic activity independently is whether they are doing so while personally bearing an economic risk and acting on their own economic initiative.
In her conclusions, AG Kokott found it doubtful that TP could be viewed as carrying out an independent economic activity on the grounds that:
- The remuneration received by TP was not for his own activities but as part of a collective body and there was accordingly no independent assumption of risks.
- The activities performed by TP could only benefit the company for which he was appointed and he thus lacked his own economic initiative.
- The remuneration received was not determined by means of a negotiation but rather by another body of the company.
- The directors participated only in the same way as a shareholder in the success of the company, which cannot be considered as equivalent to bearing one’s own risk.
Finally, AG Kokott also argued that making directors’ fees subject to VAT would undoubtedly lead to a distortion of competition between companies, which are required to act through a board of directors, and other taxable persons that are not, such as sole traders, especially in situations where the former only have a partial VAT deduction right, which would ultimately result in a VAT burden for them.
Considering the lack of general agreement on the VAT treatment of directors’ fees, the position that the CJEU takes will shed light on a much-debated topic. If the CJEU aligns its view with that of AG Kokott, the effects in practice will be as follows:
- Director services will no longer be subject to VAT in Luxembourg (either locally or self-assessed by Luxembourg taxpayers through the reverse charge mechanism).
- Directors established and registered for VAT purposes in Luxembourg will be required to deregister from VAT.
- The distortion of competition as highlighted by AG Kokott will disappear as companies with partial to no VAT deduction right will no longer incur any non-deductible VAT from director services.
- Companies may consider regularisations for previous years where non-deductible VAT has been incurred with respect to director services.
If you have any questions about how this opinion affects your business, please contact our VAT experts.