The Tax Agency exempts Directors` Activities from VAT

The Tax Agency has confirmed that the activities of individuals acting as directors or members of the board of directors of a company are not subject to Value Added Tax (VAT). This decision aligns with the criteria set by the Court of Justice of the European Union (CJEU). 

What prompted this decision by the Tax Agency? 

The decision was prompted by a recent ruling from the CJEU, in its judgment of 21 December 2023, case C-288/22 issued at the end of 2023. The CJEU concluded that the remuneration received by a physical person serving as a member of a board of directors might not be subject to VAT. This is because the remuneration is not considered compensation for an economic activity conducted independently, given that the director does not bear the economic risk of their activities. 

How does the CJEU`s ruling affect the application of VAT to directors? 

The CJEU`s ruling affects the application of VAT by establishing that independence in exercising an economic activity is requisite for VAT to be applicable. Since the directors do not bear the economic risk of their activities, but rather the company bears it, even though they contribute their expertise and participate in the board`s voting, their remuneration is not deemed independent economic activity and therefore, is not subject to VAT. 

Who benefits from this decision, according to the experts? 

According to experts from Audi Consultors ETL Global, this decision benefits both individual directors and potentially corporate entities serving as directors. The ruling could result in these activities not being subject to VAT, which could have a positive financial impact on the affected companies. 

What are the key points form the Tax Agency confirmation based on the CJEU`s ruling? 

• The Tax Agency adopts the CJEU`s criteria regarding VAT
• Individual Director`s activities are not subject to VAT if they do not bear economic risk
• Independence in economic activity is crucial for VAT applicability 
• The ruling potentially extends to corporate directors
• Positive financial impact anticipated for affected companies

How does the confirmation impact the interpretation of the VAT laws? 

The confirmation by the Tax Agency reinforces the interpretation that the key factor for VAT applicability is the independence of the economic activity. It clarifies that if the director`s role does not involve bearing economic risk, it does not qualify as an independent economic activity subject to VAT. 

How might his decision affect the administrative practices within companies? 

This decision might lead companies to reassess how they classify and manage the activities of their directors concerning VAT. They may need to review and potentially adjust their accounting and tax reporting practices to align with the new interpretation.

What could be the broader implications of this decision for tax policy? 

The broader implications for tax policy could include a reevaluation of what constitutes and independent economic activity and how VAT laws are applied. This might prompt further clarifications or amendments to ensure consistency and alignment with the principles set out by the CJEU and adopted by the Tax Agency. 

For more information and personalized advice on this matter, we invite you to consult Gentile Law.