CJEU: Luxembourg member of board of directors no taxable person for VAT

22/12/23

On 21 December 2023 the CJEU answered questions that were submitted by a Luxembourg referring judge. The questions aimed to find out whether a person appointed as a member of a board of directors ('BoD') of a company established under Luxembourg law should be considered as an independent taxable person for VAT. The CJEU ruled that the activities of this person can be seen as an economic activity for VAT, but that it is not a taxable person because the board member does not carry out the economic activity independently. The main reason for this seems to be that the person does not take on (part of) the company's business risk in the performance of his function. As this seems a very specific case, it is questionable whether this ruling will have consequences for Dutch practice.

What does this mean for your organization?

The CJEU's ruling provides clarity about the specific Luxembourg situation but raises many questions for other Member States, such as the Netherlands. The judgment shows that the board member in Luxembourg is personally appointed and that his remuneration (tantièmes) is determined by the general meeting of shareholders of the company. This legal position is therefore very similar to that of a member of a supervisory board, for which the CJEU has already ruled some time ago that it does not act as a taxable person for VAT. This also resulted in the Dutch decree regarding supervisory persons.

In the Netherlands, a board member will either have an employment contract with the company, in which case VAT entrepreneurship is excluded anyway, or will invoice a fee based on a management agreement between the person and the company or a personal holding company and the company. If such a management agreement is in place, the general rule to date will be that there are VAT taxable services. It is very questionable whether this new ruling will change this practice. We are not convinced that the independence (which is necessary for VAT entrepreneurship) is lacking if a management or service agreement is concluded, also because this would raise questions about other management services and all kinds of services that (natural) persons perform for companies. In those situations too, the service provider in principle does not take on the business risk of his customer. It is desirable that the Ministry of Finance will provide more clarity for the Dutch situation.

The judgment

Lawyer TP is a member of the board of several public limited companies under Luxembourg law, namely a bank based in Luxembourg, a holding of a logistics group listed on the Frankfurt Stock Exchange and two holdings of a pharmaceutical group listed on the Paris Stock Exchange.

TP's task was mainly to receive the reports of the directors or representatives of the companies concerned and to discuss strategic proposals, the choices of the operational directors, problems related to the accounting of these companies and their subsidiaries and the risks to which they are exposed.

TP, if necessary, participated in the preparation of decisions that representatives of the companies concerned must take at the level of the boards of directors of their subsidiaries. He also participated in decision-making regarding the accounting of the companies concerned and regarding the proposals to be submitted to the shareholders' meetings, risk management and decision-making regarding the strategy to be followed by these companies. In the Luxembourg situation, the daily management of these companies is ensured by a management committee consisting of delegated directors or managing directors or, in the absence of operational activities for which a management committee is required, by permanent representatives at the board or by members of this board.

For these activities, TP, in his capacity as a member of theboard of the companies concerned, received tantièmes over the profit made by these companies by decision of the general meetings of shareholders of those companies.

The Luxembourg tax authorities levy VAT on the tantièmes that TP received as a director. The argument is that directors of a company independently carry out an economic activity and therefore cannot escape the levy of VAT.

The Luxembourg judge refered questions to the CJEU in order to find out whether TP carries out an economic activity, and if so, whether he carries it out independently and should therefore be considered as a taxable person for VAT.

The CJEU rules that Article 9(1) of the VAT Directive must be interpreted as meaning that a member of the board of a public limited company under Luxembourg law carries out an economic activity if this member provides services for consideration for this company and these activities are of a permanent nature and are carried out against a remuneration the method of determination of which is foreseeable. With regard to the required independence, however, the CJEU rules that the activities of the board member are not carried out independently, when this member - despite the fact that it freely determines its method of operation, receives the remuneration from which it derives its income, acts in its own name and is not subject to a hierarchical relationship of subordination - does not act for its own account and under its own responsibility and does not bear the business risk associated with its activity.

Analysis

Just like in the IO case, which concerned the position of a member of a supervisory board, the CJEU rules that a board member does not carry out his economic activity independently. This seems to stem mainly from the fact that the member is appointed in person (and therefore does not enter into a management agreement or something similar) and he does not bear the business risk associated with the activities of the company in the performance of his duties as a board member. In other words, as part of a legal organ of the company, the person TP does not personally run a business risk and therefore - so the CJEU rules - cannot be considered to act for his own account and under his own responsibility. As in the IO judgment, it is striking that the CJEU apparently does not attach importance to the fact that TP as a person does run a business risk, because he is actually entering the market for management activities. After all, he will only accept the appointment if he finds the conditions under which this happens economically acceptable.

In addition, if the criterion that the CJEU applies here would have to be seen as a general rule, the consequences of this judgment could be very substantial. After all, if an interim director, self-employed person or any other service provider is hired by a company, they will also not take on the company's business risk. In our opinion, this cannot therefore be a general rule and the judgment should therefore be seen primarily in the specific Luxembourg company law context.

That does not alter the fact that the judgment raises questions for board members of Dutch companies. In the Netherlands, a board member will be appointed by statute and will either have an employment contract with the company, in which case VAT entrepreneurship is excluded anyway, or will invoice a fee based on a management agreement between the person and the company or a personal holding company and the company. If such a management agreement is in place, the starting point will now in principle be that there are VAT taxable services. It is very questionable whether this new ruling will change this practice. We are not convinced that the independence (which is necessary for VAT entrepreneurship) is lacking if a management or service agreement is concluded, also because this would raise questions about all kinds of other management and other services that (natural) persons perform for companies. It is desirable that the Ministry of Finance will provide more clarity for the Dutch situation.