On 13 July 2023, Advocate General (“AG”) Kokott delivered her opinion on the VAT treatment applicable to the services of an independent company director in the case C-288/22 TP v. Administration de l’Enregistrement des Domaines et de la TVA.
The case concerned a member of the board of directors (the “Director”) of several public limited companies incorporated under Luxembourg law who maintained, contrary to the Luxembourg VAT authority’s position that his remuneration was not subject to VAT. Aside from this activity, the Director also carried out an economic activity as a lawyer.
The Luxembourg District Court submitted a preliminary reference to the European Court of Justice (the “Court” or “ECJ”) raising the question of whether the remuneration of a member of a board of directors of a company for its activity as part of the (management) body of a legal person constitutes remuneration for an independent economic activity in accordance with the VAT Directive. EU Member States have treated this question differently with six states including Luxembourg treating the remuneration of a member of a board of directors as an independent economic activity within the scope of VAT
AG Kokott first considered whether the activity of a member of a (management) body of a company for remuneration should be regarded as an independent economic activity. AG Kokott pointed out that an independent economic activity is typically characterised by the assumption of economic risk and the capacity to decide the scope of the activity. In this respect, AG Kokott noted that the Director received his remuneration not for his own activities but as part of a collective body. Therefore, the independent assumption of risk was excluded. In addition, the Director could not offer these services to third parties on the free market, nor was his remuneration based on performance. His separate activity as a lawyer did not affect this analysis.
Therefore, while AG Kokott left the final determination to the referring court, she stated that the Director, as a member of a collegiate body of another taxable person, probably cannot be compared to a taxable person who typically carries out an economic activity independently in accordance with the VAT Directive.
Furthermore, AG Kokott argued that the principle of neutrality of legal forms pleads against the taxation of the activity of the members of a body of a taxable person where the existence of that body is a legal requirement for the taxable person being able to act (which is generally the case for legal persons). In particular, such taxation may result in a disadvantage for specific legal forms over other forms which provide identical services but do not have the same corporate requirements (for instance legal persons, as opposed to individual entrepreneurs), in the case where the activities carried out do not entitle the taxable person to a full right to deduct input VAT. Therefore, AG Kokott concludes that the principle of neutrality requires non-taxation in any case where the activity of a mandatory body of a company is concerned.
In sum, AG Kokott concluded that it follows from the principle of neutrality of legal form that a natural person who is a member of body of a company which is required by law and who receives remuneration for that activity as a member of that body cannot be regarded as carrying out an economic activity.
While AG opinions are not binding on the ECJ, they are nevertheless highly persuasive and are frequently followed by the Court when handing down its judgments.