VAT and Director Fees – Bearing Personal Responsibility and Economic Risks is Key

Background

The question as to whether board members / independent directors were to be seen as VAT taxable persons has sparked extensive debates. More specifically in Luxembourg, where the VAT authorities released, in 2016, a circular according to which it considered that independent directors carried out an economic activity within the scope of VAT. The result was that board members / independent directors - subject to specific exceptions - became liable to charge VAT with respect to their services. Likewise – and again, subject to specific exceptions - any Luxembourg VAT taxable person receiving such services became liable for Luxembourg VAT under the reverse charge mechanism.

The rationale was to consider that directors / board members were carrying out an economic activity “independently”, therefore met the definition of a VAT taxable person in accordance with the Principal VAT Directive and Luxembourg VAT law.

Decision of the Court

For the Luxembourg VAT authorities, the independence criteria hinged essentially on the absence of hierarchical subordination and the ability for directors to organise their work freely, which both have been retained by the CJEU in the present case.

However, echoing a previous decision (C-420/18), the Court introduced a further test to fully assess the independent character of a potential VAT taxable person: the assumption of personal responsibility and economic risks. 

This is why the CJEU concluded that the activity of a board member is not deemed independent when, despite organising work independently and receiving remuneration directly, the member does not act on their own behalf, does not bear personal responsibility, and does not assume economic risk related to their activity.

Consequences

The obvious consequence of that case is that it directly questions the validity of Circular 781 of 30 September 2016 issued by the Luxembourg VAT authorities.

VAT paid on services of independent directors / board members who do not meet the test laid down in the present case, in other words, who do not bear the personal liability and the economic risks inherent to their activity (i.e. to the decisions to which they actively take part) should be repayable by the Luxembourg VAT authorities. The latter might be expected to provide clarifications and guidance in that respect.

Conclusion

The judgment of the CJEU, which took a rather economical approach to the issue, may have far more reaching consequences and extend beyond board members.

The “independence” criteria for determining whether someone acts as a VAT taxable person, which is core to our VAT system, appears not to be limited to the absence of a subordination link or the capacity to act freely. Personal liability and economic risks are also conclusive.