Is the independent director subject to VAT or not?

Is the independent director subject to VAT or not ?

Is an independent director who may have several directorships in different companies subject to VAT when he invoices the different companies in which he holds a directorship ?

There is a circular note no. 781 of September 30, 2016 from the Registration Duties, Estate and VAT Authority (AED) which specifies that the activity carried out by an administrator is an economic activity within the meaning of VAT. This interpretation by AED concludes that the services of directors or managers are subject to VAT at the rate of 17%.

This was the case until the judgment of the Court of Justice of the European Union (CJEU) of December 21, 2023.

This case concerns the case of a lawyer who had directorships in several limited companies under the Luxembourg law and who carried out several missions in this context. As an administrator he received royalties.

Being in disagreement with the AED, the case was brought before the Luxembourg district court which addressed two preliminary questions to the CJEU:

Question 1 : "does a natural person, member of the board of directors of a limited company under the Luxembourg law, carry out an economic activity within the meaning of the VAT directive, and more precisely shall the fees received be considered as remuneration obtained in return for the services provided to this company ? »

Question 2: “Does a natural person, member of the board of directors of a limited company under the Luxembourg law, carry out his activity “independently” within the meaning of the VAT directive ?»

Answer to question 1:

A director of a limited company governed by Luxembourg law carries out an economic activity, within the meaning of the directive, if he provides services for the fees to this company as well as if this activity is of a permanent nature and is carried out for remuneration the calculation methods of which are predictable.

The directors therefore carry out an economic activity within the meaning of the VAT directive.

Answer to question 2 :

To answer this question, the CJEU examined whether there is a link of subordination in the exercise of the activity of administrator: the CJEU assessed the existence of the link of subordination by checking whether the person concerned carries out his activities in its own name, for his own account and under his own responsibility as well as if the person bears the economic risk linked to the exercise of these activities.

Does the administrator act in his own name, on his own account and under his own responsibility ?

According to the judgment of June 13, 2019, C-240/18: there is a relationship of subordination in the exercise of this activity.

The CJEU assesses the existence of the relationship of subordination by checking whether the person concerned carries out his activities in his own name, for his own account and under his own responsibility, as well as whether he bears the economic risk linked to the exercise of these activities.

Does the administrator act in his own name, on his own account and under his own responsibility ?

According to a judgment of September 29, 2015, C-276/14: the administrator does not receive his remuneration for his own activity but as part of a management body. It is therefore not him who is responsible but the body of which he is a part.

Article 441-8 of the law of August 10, 1915 provides that directors do not assume personal obligations with regard to the company's debts.

The tort liability which may affect a director is not decisive in this regard since this liability may fall on any person.

The liability of a director for the company's tax debts does not change anything either, since such liability is linked to the body and applies in the same way to directors and salaried directors.

As a result, the administrator does not act in his own name, on his own account and under his own responsibility.

Does the administrator bear the economic risk linked to his activity ?

The targeted economic risk always relates to the economic risk incurred directly by the person whose independent nature of the economic activity must be assessed (here the administrator). However, when a director brings his expertise and takes part in the votes of the board of directors, it is the company itself which will still have to face the negative consequences of the decisions adopted.

It is therefore the company which bears the economic risk arising from the activity of the members of the board of directors.

This conclusion is a fortiori necessary when certain elements are present: the remuneration received by the director in the form of a fee depends on the profits made by the company, fees paid as a lump sum even if the company suffers losses or is in liquidation, etc…

The result is that the administrator does not bear the economic risk linked to his activity.

In conclusion :

“Article 9(1), first subparagraph, of Directive 2006/112 must be interpreted as meaning that: the activity of member of the board of directors of a limited company governed by the Luxembourg law is not exercised ' in an independent manner, within the meaning of this provision, when, despite the fact that this member freely organizes the methods of carrying out his work, receives the emoluments constituting his income, acts in his own name and is not subject to a relationship of hierarchical subordination, he does not act on his own behalf or under his own responsibility and does not bear the economic risk linked to his activity. »

Consequences :

The AED has suspended with immediate effect the effects of circular no. 781 of September 30, 2016. The administration will ensure regularization of VAT until the limitation period.

Responsibility rests with those subject to it. Administrators should issue corrective invoices to the obliged companies receiving their administrator services. They must also prove to the AED a right to reimbursement of the VAT unduly collected.

Concerning the VAT prescription, regularization may take place up to the VAT unduly collected in 2018.

For the moment certain questions still remain unanswered, in particular with regard to the VAT deducted since 2018 by directors or the VAT deducted by companies. The same applies if the administrator was foreign and the VAT was self-liquidated by the companies, in this case it is still unknown whether the companies will have to reimburse the VAT they deducted.