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Dear Readers,

This article will inform you about a judgment of the European Court of Justice (C-288/22, the “ECJ”), which again dealt with a question of whether remuneration for performing the office of a director of a joint stock company is subject to VAT.

What Was the Judgment About?

The judgment was to consider a question whether the performance of a director’s office constitutes an economic activity for the VAT purposes and if, as a result, a director is a taxable person. The director’s activity primarily included receiving reports from the company’s representatives, participating in discussions about strategic proposals, and being involved in drafting decisions in the accounting and corporate risk area. For those activities, the director received remuneration from the profit generated by the company and partly in the form of lump sum remuneration.

According to a Luxembourg tax administrator, the director’s work met signs of an independent economic activity pursuant to Article 9 of the VAT Directive. The tax administrator considered income from the remunerations as subject to VAT and, as a consequence, assessed additional tax on those remunerations.

For the Luxembourg Regional Court, it was crucial in finding this dispute’s solution whether the individual who performs the director’s office and has no employment contract entered into or any other legal obligation assumed with the employee performed the economic activity pursuant to Article 9 of the VAT Directive. Second, whether the remunerations constitute consideration for the provided supply and whether the provided service is directly linked to the consideration.

ECJ’s Statement

In the first question, the ECJ explored if the director performs an economic activity. In the ECJ’s view, the director’s activity can be considered an economic activity in this particular case because such office is of a regular nature and, at the same time, constitutes the provision of a service for remuneration.

The ECJ stressed that pecuniary interest was manifested by the existence of a legal relationship between a provider and a receiver and, as a result, a consideration is a reward received by the provider. The remuneration’s level is agreed in advance and under precisely defined conditions, thus guaranteeing predictability and certainty with regard to the payment’s receipt.

In the discussed case, the director received income in the form of remuneration for an office’s performance either depending on the profit’s level or as a lump sum. Lump sum remuneration is, in the ECJ’s opinion, evidence of a direct relationship between the remuneration and the provided supply in the particular case.

In the second question, the ECJ examined whether the activity was performed independently, i.e. if the director performed the activity in his or her own name, to his or her account, and at his or her responsibility, and, in addition to this, whether he or she assumed the economic risk attached to the activity’s performance.

In the ECJ’s opinion referring to the content of the director’s activities, the director did not act to his or her own account and at his or her responsibility because the director does not have a controlling vote, does not represent the company and does not manage its regular operation, but tends to act to the board of directors’ account and generally to the company’s account. The director provides the board of directors with his or her expertise without bearing an economic risk from his or her activity; this risk is borne by the company alone.

Hence, the ECJ arrived at a conclusion that the director’s operation was not performed independently pursuant to the VAT Directive in the particular case, and, as a result, the director was not a taxable person for the VAT purposes and his or her income was not subject to VAT.

Stela Bartošová
bartosova@clarksonhyde.cz