On 21 December 2023, the Court of Justice of the European Union (“CJEU”) handed down the long awaited judgment on the VAT treatment of remuneration payable to members of corporate boards of directors (case C-288/22). Whether or not such a director carries out an economic activity and, as such, is a taxable person for VAT purposes, has been the subject of unresolved controversy in many Member States.

The judgement refers to the case of a member of the board of directors in several Luxembourgian public limited companies. His responsibilities included, among other things, receiving the reports of senior managers or representatives of the companies concerned and making decisions in matters of accounting or strategy. The activities of this director attracted the interest of Luxembourgian tax authorities, which claimed that he was in business (carried out an economic activity) and his 2019 remuneration was subject to VAT.

In resolving the case, CJEU focused mainly on establishing if the director meets the definition of a taxable person and may be held to carry out an economic activity for the purposes of VAT Directive.

The court held that a company director carries out a taxable economic activity if his activity:

  • involves the supply of services for consideration – in the case at hand, the form of remuneration (a profit percentage fee or a lump sum) was not an issue, but what was in issue was the fact that there were periods when no remuneration was paid (no profit = no fee) while services were supplied;
  • is permanent – one sign of permanence is renewable term of office as a director; and
  • is independent and he bears its risks – CJEU considered that the particular director did not act on his own behalf and for his own account, even though he freely managed his working time for which he received emoluments. As long as a director does not bear business risks and personal responsibility, they cannot be said to carry out an economic activity. Mere participation in company profits cannot be equated with the director personally assuming the risk of profit or loss.

In consequence, the court held that, in view of Article 9(1) of the VAT Directive, the director was not engaged in an economic activity carried out independently so his remuneration was not subject to VAT.

While the judgment refers to a Luxembourgian company, it does have direct effect in all Member States given the common system of value added tax. It is advisable to note the court’s tests for whether a director (board member) is a taxable person, and use them when structuring directorships in your companies.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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