Advocate General Opinion regarding remuneration of Directors

In detail

Background

TP, a lawyer, is a member of the board of directors of a number of public limited companies incorporated under Luxembourg law. As a member of those boards, he takes part in decisions concerning the accounts, risk management policy and the strategy to be followed by the group in question, and in developing proposals to be put to shareholders’ meetings. In his role as director, TP received fees in the form of a percentage of company profits, with the amount of the payment based on a decision of the company’s shareholders.

The Luxembourg VAT authorities have made their stance clear in Circular ⁿ°781, which explicitly recognises the activity of independent directors as being subject to VAT.

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 Luxembourg VAT authorities disagreed with TP’s approach and took the position that VAT was due on the percentage fees because a company director independently carries out an economic activity and thus qualifies as a taxable person for VAT purposes, leading to the dispute in this case.

The court has asked the CJEU to rule on whether:

• Percentage fees received by a board member of a Luxembourg public limited company should be regarded as remuneration paid for services supplied to the company; and
• An individual who is a board member of the company carries out his activity independently within the meaning of articles 9 and 10 of the VAT directive.

The Advocate Generals Opinion

The AG took the position that the VAT status of an independent director should ultimately be assessed on a case-by-case basis considering all the circumstances of the activity performed. The decisive factor in the assessment should be, according to AG, whether the person concerned personally bears an economic risk and takes their own economic initiative in the context of their activity.

The Advocate General 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 initiative but as part of a collective body and there was accordingly no independent assumption of risks.
• The activities performed by TP as part of a body could not be carried out on the free market to third parties and could only benefit the company for which he was appointed.
• The level of remuneration was not dictated by the workload involved.
• 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.

With regards to TP’s status as a lawyer being a member of the board, the AG opined that it is possible to separate TP’s normal independent economic activity as a lawyer and their participation in the board.

Finally, the AG argued that making directors’ fees subject to VAT would 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.

Comments

The AG in considering the question of economic activity concluded that a typological comparison should take into account whether the director bears personal economic risk in undertaking their duties and acts on their own economic initiative. They left it to the Member State concerned to determine whether this is the case but also casting significant doubt whether there was in the present case . In considering the requirement for independent activity the AG concluded that a board member, being part of a body of a company cannot be considered to be acting independently.

Although not binding, the opinion of the AG is persuasive and is usually followed by the CJEU when handing down decisions. The present decision appears to cast into doubt the position adopted in Cyprus with respect to remuneration of directors. The Cyprus Tax Department regards directors generally as taxable persons except in certain specific circumstances which are outlined in the VAT Circular No. 205 issued on 7 October 2016.

It is therefore recommended, in light of the above decision, that any existing agreements involving directors’ remuneration are reconsidered on a case-by-case basis. Also, any new such relationships should be reviewed in advance from a VAT perspective.

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