The current state of play in Romania is not to tax, other than as a regular employment contract, fees received by administrators, directors, or board members – natural persons. Across the EU, though, the topic has been under the spotlight of the tax authorities, and several cases have reached the Court of Justice of the European Union (CJEU) in recent years.
EU bodies appear to have considered this issue some time ago, given the following comment in the minutes of an EU Council meeting on the Sixth Directive of 1977 (the predecessor of the VAT Directive), which states that the member states may ”consider… as not liable to value added tax… the managing-directors, auditors, [members of the supervisory board] of companies in their relations with the companies to the extent that they form a part of such companies”. Though this option does not appear to follow from the VAT Directive, it highlights the concerns that already existed at that time in the EU with regard to taxing the activities of bodies of companies.
How are such fees treated?
Without a specific legislative basis, the practice in Romania is not to charge VAT, as such fees are deemed as salary income when received by natural persons, in the exercise of their mandate.
Still, such revenues are subject to VAT when charged by a company that carries out these activities. Is such practice supported by the VAT principles applicable in Romania and at EU level? In other words, could we be dealing with a paradigm shift at Romanian level, given the evolution of CJEU case law?
VAT is due by taxable persons. And taxable persons can be individuals if they independently, and in any place, carry out any economic activity, whatever the purpose or results of that activity.
An individual cannot be considered as liable to VAT if they carry out their activity in the name, and under the responsability, of an employer from which they receive a salary type of remuneration, without bearing the economic risk of their activity. It is the company they represent that engages in relationships with third parties, signing the contracts and being responsible for any damages to third parties arising from the activities carried out (and not the individual).
Through its decision in case C-420/18, the CJEU confirmed that a member of the supervisory board of a foundation could not be deemed an employee since he was not in a hierarchical subordination structure typical to that of an employer-employee relationship regarding work conditions and did not receive instructions from the governing board of the respective foundation. However, the respective member did not carry out an economic activity independently, as he only acted on the account and responsibility of the council. And the fixed fee received, which did not depend on participating in meetings or hours effectively spent, did not indicate an economic risk in his charge.
Key questions
The interest of national tax authorities in this topic is growing, resulting in the latest reference for a preliminary ruling made to the CJEU by the tax authorities in Luxembourg, in case C-288/22: can an individual member of the board of directors of a joint-stock company be seen as acting independently? And should the variable fee received from the company’s net profit be seen as a VAT-able consideration for a service rendered to this company?
To these questions may be added the following: to what extent should the legal status of the provider (an individual or a legal entity) influence the applicability of VAT? In other words, if legal entities with similar attributions charge VAT, can one treat as outside the scope of VAT such remuneration received by individuals, by simply assimilating it with salary?
The opinion of the advocate general (AG) in case C-288/22 seems to tackle this aspect as well, with the conclusion that, for not distorting competition and breaching fiscal neutrality, no such fees should be subject to VAT (irrespective of the legal status of the recipient).
However, the CJEU is still to issue its decision in this case and it is expected that the result will draw the attention of board members, directors, and administrators, considering the current practice in Romania and pressure on collection.
The main question remains: is VAT chargeable on remuneration received by individuals? Any answer must have its roots in the substance-over-form principle. And for VAT, it is not the legal status which dictates the VAT regime, but the economic substance of the operations. So, for similar activities, the VAT regime should be the same, irrespective of the status of the supplier, whether they are an individual or a legal entity.
What could happen next?
The answer hangs on the decision to be issued by the CJEU in case C-288/22, which, if it follows the AG’s opinion, will bring an additional layer of comfort to persons exercising such functions in exchange for consideration.
If the AG’s approach is confirmed via the final decision of the CJEU, then it is a matter of reassessing the impact for companies acting in this role, including the impact on VAT deduction and tax neutrality. Else, this would create a playground for divergent interpretations regarding VAT versus salary taxes.
