Members of a supervisory board or board of directors do not engage in economic activity even if their remuneration is variable

Members of a supervisory board or board of directors do not engage in economic activity even if their remuneration is variable – Opinion of the Advocate General of 13 July 2023 (C-288/22)

It was not until 2021 that the BMF (German Federal Ministry of Finance) decided, based on previous ECJ and BFH (Federal Fiscal Court) case law, that supervisory board members are not independent if they receive a fixed remuneration because there is no remuneration risk (as we reported here). After companies and supervisory boards had adapted (in some cases with great effort) to this new legal interpretation, the ECJ Advocate General is now causing confusion again by stating that the type of remuneration is irrelevant; even in the case of variable remuneration, there is no independent activity and thus no economic activity.

What has happened so far

In the "IO" case (ruling of 13 June 2019, C-420/18), the ECJ had elaborated that a supervisory board member receiving a fixed remuneration does not bear the typical risks of a taxable person. This was followed by the BFH in its ruling of 27 November 2019 (V R 23/19). In its letter of 8 July 2021, the BMF followed suit and amended the UStAE (administrative guidelines to the German VAT Code) accordingly. Since the BMF had recognised the type of remuneration as a decisive factor, the authority also developed regulations on mixed remuneration, something which had not been addressed by the case law. These could now possibly become obsolete.

Advocate General: No economic activity even in the case of variable remuneration

In the "TP" case concerning the board of directors of a Luxembourg SA, the Advocate General once again takes a close look at the question of independence and comes to the conclusion that a member of a board of directors is not engaged in independent economic activity even if it receives variable remuneration. The AG’s arguments are essentially the following:

The member of a board of directors, unlike e.g., a mandated lawyer, is not contractually liable if his/her advice is wrong. Any tort liability affects everyone (including the employees) and therefore cannot be considered independent.
Unlike a taxable person, a member of a board of directors cannot offer its activities on the free market.
He/she is not free to negotiate his/her remuneration as this is determined by the general meeting.
Although there might not be a typical relationship of subordination as with an employer/employee relationship, this was not necessary in order to deny the status as a VAT-taxable person.
Even if the board member’s remuneration is variable based on the company’s success, the board member is only involved in the company’s economic risk to the same extent as a shareholder without actually bearing the risk. The situation is comparable to an employee who, in addition to his/her fixed salary, receives variable remuneration based on the success of the employer – this employee does not become a VAT-taxable person either.

Practical implications

There are certain differences between the board of directors (“Verwaltungsrat”) of a Luxembourg SA and the supervisory board of a German public limited company (“Aktiengesellschaft”) under company law, which, however, do not seem to play a role in the Advocate General's argumentation. German public limited companies and their supervisory boards should therefore also be prepared for further changes with regard to the VAT treatment of remuneration. If variable remuneration were also non-taxable, members of supervisory boards would no longer have to issue invoices with VAT, which would be advantageous for companies lacking the right to deduct input VAT. However, the supervisory board members would lose the input VAT deduction from their expenses.

The ECJ's decision should be awaited before any tax consequences are drawn. However, appeals against existing tax assessments can already be filed now, as far as this is still possible under procedural law, and an application can be made to stay the proceedings in the light of the Advocate General’s opinion.

Dated: 01 August 2023