EU court rules on VAT treatment of director fees

The court was asked to rule on whether VAT applied to consideration for services rendered by a member of the board of directors of a public limited company. It had to consider whether that director was carrying out an “economic activity” under Article 9 of the VAT Directive (218 pages/ 4,291 KB) – whether the director received fees in return for services provided to that company – and whether the director carried out this activity “independently”, within the meaning of Articles 9 and 10 of the VAT Directive.

The CJEU decision highlights that directors must be providing a supply of services considered an “economic activity” Maria said. In this case, these services included receiving reports from managers and legal representatives of the company; and discussing proposed strategy and issues related to the company subsidiaries together with the risks incurred by them. Services could also include participation in decisions made by legal representatives of the company, and other services out with the company’s daily management, aside from being part of the management committee that takes care of it. The court said that these services should be considered an “economic activity” when permanent in character (for example it is the case when directors are nominated for 6 years (even though revocable ad nutum)), and where remuneration for the activity is sufficient and on a continuous basis – for example, fees are paid even when the company does not make a profit.

The court also considered when “economic activity” is being carried out independently for VAT purposes. For activity to be independent, the director must perform it in his own name, for his own account, and should bear all the risk. Further, if a director is part of a board, the consequences of a decision taken by the board must be borne by the company and not the individual members of the board, especially when the members of the board do not engage their respective personal liability for the debt of the company notably as per national law and the remuneration is fixed by the board.

Raffini said that the national decision to be issued by the Luxembourg jurisdiction should hopefully give more criteria and guidelines to assess whether there are some cases where director should be considered carrying out his activity independently (i.e. depending on the form of the company and the mandate given) and thus subject to VAT. “The Court decision was based on the fact that the director did not have a casting vote in the public limited companies, he was not involved in the day-to-day management of the company, and he was not part of the management committee” she said.

The Luxembourg tax authorities repealed the circular dated 30 September 2016 regarding VAT on Director fees and specified that after the judgement at the national level will be rendered, there will be “non-bureaucratic regularization of the tax on the part of the administrators, until the limitation period”. It is to be noted that directors not subject to VAT will see their administrative burden decreased (i.e. VAT registration, filling of VAT return and issuance of VAT compliant invoices not required anymore).

The VAT authorities already open the door for introduction of claim to obtain the reimbursement of the VAT wrongly paid. On the 15 of January, it was published on the VAT authorities website that “Therefore, in so far as a person considers himself to be concerned by the judgment of the Court of Justice of the European Union ('CJEU') C-228/22, it is for him to issue corrected invoices to taxable persons who provide his services and to prove to the VAT authorities a right to a refund of the VAT wrongly levied. Any balance in favour of such a taxable person shall be reimbursed to him by the VAT authorities on the basis of Article 55 of the amended Law of 12 February 1979 on value added tax.”