VAT status of company directors: insights from the “TP” case

On July 13 2023, in the “TP” case, the Advocate General (AG) of the Court of Justice of the European Union (CJEU), Juliane Kokott, opined that a natural person acting as a director of a company is not a VAT taxable person because they do not exercise an economic activity in an independent manner.

Mr. “TP,” a Luxembourgish lawyer and non-executive director of several Luxembourg companies, was assessed in 2019 by the Luxembourg VAT authorities because, despite Circular 781 of September 30 2016, he had decided not to apply VAT on his director fees. The dispute came to the Luxembourg Civil Tribunal, which referred the case to the CJEU, asking whether a director can carry on an economic activity independently, as defined in article 9.1. of the VAT directive (Council Directive 2006/112/EC).

The AG noted that a director does not act on their own but rather as a member of a collegial body, and a key factor is whether they personally bear an economic risk. She pointed out that, according to article 448.1. of the Luxembourg company law, “no personal obligation arises on the part of the directors in relation to the commitments of the company.” She added that tort liability is irrelevant because it affects any person, including non-taxable employees who are under the authority of their employers.

She noted that the renumeration of directors is not determined through negotiations, which is a characteristic of an activity performed independently. Instead, it is set unilaterally by the company and is not affected by the director’s workload. Even if a director were to receive a variable remuneration (which was not the case for Mr. TP), it could not be equated with assuming a personal risk. Rather, it would be a share in someone else’s profit, such as the variable part of an employee’s remuneration.

In addition, AG Kokott ruled that the fact that Mr. TP was a VAT taxable person due to his activity as a lawyer did not “contaminate” his directorship activity because the two are separate. Lastly, she pointed out that submitting director fees to VAT would violate the legal principle of neutrality. This is because companies, with no or only a limited VAT deduction right but with a legal obligation to appoint directors, would be disadvantaged compared to other persons, such as sole traders, who does not have such obligations.

Accordingly, she proposed to the court that a natural person acting as a director of company should not be considered a taxable person for VAT purposes because they do not carry out an independent economic activity.

As pointed out by AG Kokott, the VAT status of directors is not harmonised at all within the EU. Six member states consider that a director is not a taxable person, six others find that it could be, under certain conditions, and Luxembourg considers that a director is generally a VAT taxable person. It seems that 14 other states have no position at all, or at least no official position is available.

If the court were to decide that a director is a taxable person, the six member states taking the opposite view would have to mandate that their directors comply with the rules applicable to all VAT taxpayers: registration, filing of returns, issuance of invoices, charging of VAT, etc. This would create an additional administrative burden for directors and unrecoverable VAT for companies and other entities that cannot or can only partly deduct their input VAT.

If the court’s decision were to align with the AG’s opinion, the outcome would be contrary to the position of the member states that consider directors VAT taxable individuals. Directors would have to deregister for VAT, stop charging VAT on their fees, and stop filing VAT returns. Depending on each member state’s rule, there could be a possibility of reclaiming previously paid VAT on director fees. For companies and other entities with no or a limited ability to deduct VAT, the burden of unrecoverable VAT would be reduced.

Case-by-case evaluations would be necessary in member states that do not define their stance.

Although the court often follows its AG’s opinion, exceptions do exist. Thus, we cannot exclude a divergent decision. Considering the court’s usual deadlines, a decision could be released at the end of 2023 or early 2024.