On December 21 2023, the Court of Justice of the EU (CJEU) issued its judgment in a case (C-288/22) that is of particular importance and may have a significant impact in some EU member states.
The case refers to a person who acted as a member of the board of directors of several public limited companies incorporated in Luxembourg. As a member of those boards, he takes part in decisions concerning the strategy of those companies, receiving a remuneration for this work.
This person took the view that his remuneration was not subject to VAT as his activities are not carried out independently but as a member of a collegiate body (the board). The latter represents the different companies and therefore the service provided collectively is deemed to be provided by the company itself.
As one can summise, the above view was not shared by the tax administration, which considered that members of a board of directors shall be regarded as taxable persons carrying out an economic activity within the meaning of Article 9 of the VAT Directive, so the person’s activity is subject to VAT.
The implications of the case
This case has many practical implications, as in the event that a member of a board is considered to be engaged in an economic activity carried out independently, their fees will be considered as remuneration for that economic activity, placing that person within the scope of VAT, with all that this implies (the issuance of invoices, the filing of VAT returns, etc.).
The advocate general's opinion on the case was clear in this regard, saying that the decisive factor for the determination of the existence of an independent economic activity is if the person carrying out the activity bears an economic risk personally and acts on their own economic initiative. The advocate general concluded that a natural person who is a member of the board of a company cannot be regarded as carrying out an independent economic activity.
The CJEU's decision is not as clear and direct as the advocate general's opinion, although it allows for the possibility to exclude these transactions from the scope of VAT. In the court´s opinion, the activity carried out by the member of the board should be considered as an economic activity since it will be viewed as a provision of services supplied on a continuing basis and for a foreseeable remuneration.
However, the above is not enough to conclude that the activity would be subject to VAT. To conclude that, the activity must be carried out independently. It is therefore necessary to ascertain whether there is an employer-employee relationship while performing the activity.
To assess whether an employer-employee relationship exists, it is necessary to check:
Whether the person performs the activities in their own name, on their own behalf, and under their own responsibility; and
Whether they bear the economic risk of the activity.
In this regard, there is an absence of an employer-employee relationship if the person is free to arrange how they perform their work and receive the income of their activity. The fact that the members of a board of directors are free to submit to that board proposals and are free to vote for them is an indication of a lack of an employer-employee relationship but is not decisive and the circumstances of the case must always be considered.
The allocation of responsibilities among the board members is also a fact to consider. It is especially important to determine whether board members assume any type of obligation or responsibility in relation to the commitments of the company.
Finally, with regard to economic risk, if, according to the applicable legislation, it is the company that will have to confront the negative consequences of the decisions adopted by the board of directors and not the directors, the former will bear the economic risk resulting from the activity of the members of its board.
The CJEU’s conclusion is that the activity of a member of a board of directors may not be carried out independently – even if the board member is free to arrange how they perform their work – if, in accordance with the considerations of the case, they do not bear the economic risk linked to their activity.
Final thoughts on the CJEU’s decision
The court has opened up the possibility that the services of the members of a board of directors are outside the scope of VAT despite potentially having some similarity to those provided by an independent consultant.
The truth is that when thinking about the members of a board, one hardly sees the figure of a typical VAT payer (and an individual with their own economic initiative). However, the final decision must be made depending on the circumstances of the case and the applicable law in the country concerned; in particular, regarding the responsibilities assumed by the members of the board in relation to their activity.
