Variable board remuneration is also not automatically taxable: ECJ ruling "TP" of 21 December 2023, C-288/22

On 13 June 2019, the ECJ ruled in the "IO" case (C-420/18) that the activities of a supervisory board member did not constitute self-employment and were therefore not subject to VAT because the board member did not bear any entrepreneurial risk. The Federal Ministry of Finance subsequently amended its application decree to the effect that fixed remuneration is not taxable, but variable remuneration is. According to the current ECJ judgement "TP", this is no longer tenable in such a generalised way.

The facts:  Board of Directors with bonus

The subject of the dispute was the activities of TP, a member of the board of directors (“Verwaltungsrat”) of a Luxembourg public limited company, who also worked independently as a lawyer. For his work, he received fees from the profits generated by the company plus a lump sum.

Under Luxembourg law, a member of the Board of Directors may also be entrusted with the management of the day-to-day business, but this was not the case with TP. Instead, amongst other things, he received reports from managers and discussed strategic proposals. Board members do not enter into any personal obligations with regard to the company's liabilities but are liable "under general law" for the execution of their mandate.

The referring Luxembourg court wanted to know whether TP had independently carried out an economic activity that was subject to VAT.

ECJ: No independent activity without economic risk

Before the ECJ dealt with the question of whether the requirements for independent activity had been met, it first examined in detail whether there was an economic activity. Was there a direct link between the services provided by TP and the consideration received? The ECJ decided that yes, there was, even if the amount was not determined by TP’s individual performance. However, the referring court had to examine whether TP received an amount objectively appropriate to his performance even if the company made only a minimal profit or none.  In addition, TP had to carry out his activities on a sustainable basis, which implied that the remuneration also had to be of a sustainable nature. In the case of a six-year term of office, sustainable activity is to be assumed, even if immediate dismissal is legally possible at any time.  However, the sustainability of the bonus depends on the fact that it is paid even if the company has not made any profits, meaning that the methods of determining it are foreseeable.

With regard to the economic nature of the activities, the ECJ emphasised that its assessment was based on the premise that TP did not have a casting vote on the board of directors and had not taken on any management duties. The ECJ left the specific decision in relation to TP to the referring Luxembourg court, stating that the following criteria for independence must be met:

  • TP must be free to organise the modalities of his work.
  • He must not be in a hierarchical relationship of subordination.  The fact that TP was free to submit proposals and advice to the Board of Directors is an indication that there is no relationship of subordination.
  • He must act in his own name, for his own account and on his own responsibility, whereby national company law, in particular, must be taken into account.  The fact that the distribution of responsibilities in the present case is comparable to those in an employment relationship argues against TP's own responsibility.  The lack of personal responsibility, in turn, argues in favour of TP acting in the interests, and for the account of, the company.
  • TP must bear his own economic risk. To the ECJ, this does not appear to be the case here as it is not TP but rather only the company that must bear any negative consequences of TP's decisions. This applies, in particular, if there is no personal liability under national law, even if a profit-related fee is involved because participation in the company's profit cannot be equated with a personal risk of profit and loss. If the company grants the fee in the form of a lump sum paid even if the company has made a loss, this applies all the more.

Implications/practical relevance

Although a board of directors can also perform management duties under Luxembourg law, this was not the case with TP. The judgement should therefore be transferable to a German supervisory board, but not to a management body.

For the ECJ, the assessment of taxability is much more complex than the solution of the German tax authorities in sec. 2.2 para. 3a UStAE (administrative decree to the German VAT Code), which only distinguishes between variable and fixed remuneration: variable remuneration is subject to VAT, but fixed remuneration is not. According to the ECJ judgement "TP", this should no longer be tenable in such a generalised way, as even variable remuneration does not automatically indicate the independence of the economic activity. Instead, the supervisory board member must also bear the company's risk of loss.

Furthermore, from the ECJ's point of view, it is not only the self-employment of supervisory board members that is an issue but also (upstream) the question of whether it is an economic activity at all. The decisive criterion here is the sustainability of the activity and the remuneration.  While the judgement contains little tangible information on the former, the requirements for remuneration are clear: it must be paid even if the company generates a loss and in an amount commensurate with the service provided.  The German administrative decree currently does not address this issue at all and will probably have to be amended in this respect.

In practice, this case law will mean that more supervisory boards will no longer be taxable.  As a result, they will no longer be able to deduct input VAT for related input services. Companies that are not entitled to deduct input VAT, however, will benefit because they will no longer receive invoices with VAT from the supervisory board members.


Nadia Schulte
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