Tax on the remuneration received by members of the board has been the object of debate and analysis within the Spanish and European legal systems. Some countries consider that said remuneration should be subject to VAT, in as far as it amounts to an economic activity of a commercial nature.
On the other hand, other countries consider that in most cases board members do not fulfil the requirements to be a taxable person of said tax, since more often than not they do not act on their own behalf and neither to they assume the entire business or professional risk when performing their functions.
In Spain, tax treatment is based upon the relationship theory, which establishes that it is incompatible to combine a top management labour relationship, focused on the management and representation of a company, with the corporate relationship of director, and therefore one must absorb the other. Depending on which one prevails, the remuneration is taxed either as employment yields or as earnings from economic activity.
In the majority of cases the corporate relationship prevails due to the activities carried out by the board member, or the relationship with the company.
Judgement of the Court of Justice (Third Chamber) of 21st December 2023, case C-288/22.
Recently, on 21st December, the Court of Justice of the European Union (CJEU) passed a judgement dealing with this problem, shedding light on the taxation of services rendered by members of a Board of Directors.
In this case, a board member forming part of the board of directors of several joint-stock companies incorporated in Luxembourg received a tax assessment subjecting his activity to VAT, which he appealed. His activities as a board member consisted of receiving reports from top management or representatives of the companies, discussing strategic proposals, appointing operative executives and participating in decision making regarding the accounts of the companies and the proposals which would be presented at shareholders’ meetings. In exchange, the board member received remuneration in the form of “percentage fees”, that is to say, a percentage of the earnings of the companies, as approved by the general shareholders’ meeting.
The Luxembourg tax authorities upheld that directors of companies carry out economic activities independently and, therefore, their remuneration is subject to IVA. The court in Luxembourg referred the case to the CJEU in order to determine:
- Whether a member of the Board of Directors carries out economic activity under the VAT Directive of the EU when it renders services to the company in exchange for a remuneration.
- Whether the activity of a member of the Board of Directors is considered to be an independent activity for the purposes of VAT.
The interpretation of the European VAT Directive, which establishes that those who independently” carry out an “economic activity” shall be considered taxable persons, became the point of reference for determining whether the remuneration of board members is subject to VAT.
In the judgement, the European court declares that, in principle, the work carried out by board members constitutes an economic activity subject to IVA, as they receive remuneration for a service rendered on a continuous basis over time. Nevertheless, beforehand it is necessary to determine the independent nature. The European Court thus highlights the importance of determining the liability and independence of a board member with regard to the company and the nature of its activity.
In order to do so, the CJEU analyses whether the activity is carried out independently, whether there is a subordinate relationship between the board member and the company, the freedom of the board member to propose and vote within the company, as well as the assumption of the financial risk linked to the activity. In this regard, the CJEU concludes that, in the specific case, the board member’s activity was not carried out in an independent manner, since he did not act under his own responsibility, nor did he assume the financial risk derived from his decisions and therefore determines that his remuneration is not subject to VAT.
In conclusion, the CJEU determines that the activity which the members of a board of directors carry out does constitute an economic activity, but it is not subject to IVA as it does not have an independent nature for VAT purposes, provided that the board member:
– Does not bear a financial risk linked to his own activity,
– nor does he act under his own responsibility.
In other words, if the company itself is responsible for the decisions adopted by its board of directors, the board member’s activity is not independent and, consequently, in most cases his activity will not be subject to VAT.
Impact on the interpretation of the directive by the Member States
The decisions of the CJEU are binding for Member States and other European Union institutions. This means that national courts of the Member States must follow the interpretation established by the CJEU in application of European Union law.
However, the question of whether services rendered by board members are subject to VAT remains a complex and debated issue in European law. Recent CJEU rulings provide important guidance, but do not resolve the substance of the issue. The divergence of interpretations between Member States continues to complicate a consistent and harmonised application of the tax rules on board members’ remuneration.
For the time being, in the wake of this recent ruling, the Luxembourg tax authorities have issued a circular immediately suspending the application of the Luxembourg VAT rules on the remuneration of board members until the Luxembourg court issues its decision on the merits of the case, once the pronouncement on this preliminary ruling is known.
Julio González Valverde
Vilá Abogados
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2nd February 2024
