The opinion of Advocate General KOKOTT regarding the Case C-288/22 : Towards a non-application of VAT on independent directors’ fees ?

While the Grand-Duchy of Luxembourg has generally considered since the Circular n°781 of 30 September 2016 (Activities of company directors) that activities performed by a director of a legal entity constitute an independent economic activity, Advocate General (“AG”) Juliane Kokott has expressed an opposite view. She defends this view in her opinion submitted on 13 July 2023 on the request for a preliminary ruling in the case TP v. The Registration Duties, Estates and VAT Authority (hereinafter the “Case”).

AG highlights two points specific to the case, basing her reasoning on the concept of an independent economic activity and on the principle of neutrality of legal form.nn

A) An independent economic activity

As the VAT Directive states, a taxable person is someone who carries out an economic activity independently, regardless of the goals or results of that activity. AG Kokott develops the point by adding that carrying out an independent economic activity also means to bear the economic risks and choosing the scope of this activity and the related benefits.nnIt should be noted here that TP, in the Case, does not bear any economic risks as a director, a function that is in fact different from his primary activity as a lawyer. AG Kokott points out that TP cannot offer his activity as director to other third parties on the open market, which is contrary to the qualification of independent economic activity. Furthermore, the terms of the director’s remuneration are set in advance by the general meeting of shareholders on a proposal made by the board of directors.nnIt is also important to highlight that carrying out a primary activity that falls within the scope of VAT may have consequences for ancillary activities, if the latter have a definite link with the primary activity. If that were the case, the ancillary activities would have to be treated in the same way as the main activity and de facto fall within the scope of VAT. This fact would require, as AG Kokott points out, analyzing every VAT treatment of directors on a case-by-case basis.nnIn this particular case, TP’s activity as a lawyer has no definite link with his activity as a director and therefore, on the basis of all the points mentioned above, AG Kokott establishes that TP’s activity as a director cannot be qualified as an independent economic activity.

B) Principle of neutrality of legal form

The principle of neutrality of legal form requires an equal treatment of economic operators carrying out the same operations in respect of the levying of VAT. AG Kokott points out that if the remuneration paid for the activities performed by a director of a legal entity were considered to be subject to VAT, the afore-mentioned principle would be infringed.nnIn fact, for the functioning of certain legal forms, the law requires the setting up of corporate bodies, whereas for others, such bodies are not necessary (notably traditional sole traders). As a result, legal forms operating through these bodies are liable to pay VAT, unlike other forms (VAT that may be definitive if they do not have a right to deduct), ergo the principle of neutrality of the legal form is violated.

C) Conclusion

Although the points made by AG Kokott in relation to the case appear to be relevant, we will have to wait for the judgment of the Court of Justice of the European Union (“CJEU”) to know whether the latter, as it frequently does, will follow the Advocate General’s conclusions. Should the CJEU agree with AG Kokott’s position, the main consequences could be summarized as follows:

    • Directors’ remuneration would no longer be subject to VAT;
    • Directors will have to de-register for VAT (in the eventuality that it is their primary activity);
    • Potential restitution of the VAT paid until now.

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