Performance of the function of a member of a statutory body as an economic activity
In the judgments, the SAC assessed the performance of the function of the chairman of the board of directors of the company and came to the conclusion, similarly to the previous case law1 on the executive directors of companies, that the performance of the function can be considered an independent economic activity.
At the same time, the SAC also concluded that the Czech Act on Value Added Tax (VAT) conflicts with the EU Council Directive on the Common System of VAT (the Directive), stating in Section 5 (3) that performing the function of the statutory body of the company is considered a non-economic activity from the point of view of VAT. This is because the remuneration for this performance is subject to tax on income from dependent activity according to Section 6 of the Income Tax Act2.
The tax administrator denied the applicant the right to deduct VAT on supplies made to them by a member of its board of directors under a mandate agreement on the grounds that those supplies were not provided by a taxable person.
The SAC referred to 2 Afs 100/2016 – 29, when it did not find any relevant differences that would justify a different assessment of the performance of the function of the chairman of the board of directors of a joint stock company from that of the managing director of a limited liability company.
It follows from the case law of the Court of Justice that two aspects of the activity pursued are decisive in determining whether a particular economic activity is independent. This is the autonomy of the function and the associated responsibilities.
In the SAC's opinion, the required aspect of the autonomy of office and the responsibilities associated with it can be seen in the nature of the activities of the executive director of a limited liability company or chairman of the board of directors of a joint stock company under Czech law. Based on this conclusion, it found the similarity of the performance of the function of the statutory body with the case assessed by the CJEU in C-202/903 Recaudadores.
The SAC therefore concluded that if the executive director or chairman of the board of directors works for a fee, it must be regarded as an independent economic activity within the meaning of Article 9 (1) of the Directive and not be excluded from the system on the basis of Article 10 of the same Directive.
As regards compliance of the VAT Act with Article 10 of the VAT Directive, the court found that Section 5 (3) of the VAT Act, by excluding natural persons from the VAT system on the grounds of their income taxation, constituted an inadmissible inequality arising from the legal form of the business. This is due to the fact that the executive director can also be a legal entity, to which the exclusion from the circle of taxable persons does not apply, although the nature of the executive director's function is still the same.
The provisions of the Directive, in particular Articles 9 and 10, must therefore be given direct effect in the present case, i.e. the capacity for direct application to the case before the national authority.
In practice, the cited conclusion of the SAC means that the executive director or member of the board of directors (and probably also other persons in a similar position) may consider their remuneration for the performance of their function as performance subject to VAT. In such a case, they issue an invoice for their remuneration, which is taxed at the statutory VAT rate, and the recipient of the performance is entitled to deduct this tax. This procedure applies in the case of performance within the Czech Republic.
Surely you are wondering why it would be more advantageous for the executive director – the taxpayer – to apply the above-mentioned taxation?
Let me give an example:
The executive director of the XY company is also a self-employed taxpayer. He buys a personal vehicle as a self-employed person and applies a VAT deduction to it. He also uses the vehicle for his activities as the company's executive director. He is faced with the question of whether he is entitled to claim the full right to deduct VAT when acquiring the vehicle. If he evaluates the activity of the executive director according to Section 5 (3) of the VAT Act as a non-economic activity, then his right to deduct is limited to Section 75 of the VAT Act. The ratio between his economic activity (self-employed activity) and performance as the company's executive director (e.g. the ratio of income from individual activities is offered) must be determined. And with this "ratio coefficient" the right to deduct tax from the purchased car is reduced. You can imagine what other services received will reduce the right to deduct (e.g. fuel, vehicle repairs, etc.).
If he uses the direct effect of the Directive and assesses the activity of the executive director in accordance with Article 9 of the Directive as an economic activity, then his deduction will not be limited in any way due to the performance of the function of the statutory body.
In conclusion, I note that the tax administrator is not entitled to dispute the procedure that the statutory body of the company chooses when applying or not applying VAT to his remuneration.
1 Judgment NSS 2 Afs 100/2016-29 of 22 November 2016
2 Section 5 (3) of the VAT Act – self-employed economic activity is not the activity of employees or other persons who have a contract with the employer, on the basis of which an employment relationship is established between the employer and the employee, or the activities of persons which are taxed as income from dependent activity.
3 Judgment SDEU C – 202/90 Recaudadores of 25 June 1991