Change to local Interpretation concerning the ‘supply’ of directors
Summary
In terms of article 5 of the VAT Act, the activities of an ’employee’ which, by definition includes the ‘holder of an office’, are not regarded as an economic activity for VAT purposes. In effect, where an individual is appointed to the post of Director of a Company, the fees paid by the company to the Director by way of remuneration for his/her activities or ‘services’ would typically fall outside the scope of Maltese VAT.
Article 5 has historically been interpreted to extend in practice also to scenarios in which the Director’s fee/remuneration is not paid directly to the Director, but is instead paid to another company (for example, a corporate services provider) which has ‘supplied’ the Director for its client. Historically, local practice has been to consider the fees paid to companies who refer Directors to fall outside the scope of Malta VAT, on the basis that the said fees paid constitute remuneration for an activity which is not to be considered to be an economic activity for VAT purposes i.e. that of the ‘holder of an office’.
The VAT treatment of Directors’ services – the Legislation
It is a fundamental principle of VAT that VAT is chargeable on supplies of goods or services when certain conditions are satisfied, inter alia, when the supply is made by a “Taxable Person” acting as such. It follows that activities carried out by a person who is not acting in the capacity of a Taxable Person fall outside the scope of VAT. In terms of Article 5 of the Value Added Tax Act (CAP 406 of the Laws of Malta), a Taxable Person is any person carrying on an economic activity, which by definition excludes the activities of ‘employees’, as defined to include the holder of an office. As a result, the activities of the holder of an office, which includes an individual appointed to the post of Director or Company Secretary of a Limited Liability Company, in principle fall outside the scope of VAT.
The VAT treatment of Directors’ services – implications
On the basis of the above, where an individual is appointed to the role of Director of a Company, the fees paid by the Company to the Director by way of remuneration for their activities or ‘services’ qua Director would typically fall outside the scope of VAT. In other words, since these activities are not regarded as economic activities for VAT purposes, the fees do not in principle constitute consideration for a service falling within the scope of VAT, and therefore no VAT is chargeable thereon. In practice, this would refer to the emoluments/fees paid directly to the Director in their own name, whether the said Director is registered as an employee of the Company for the purposes of the Final Settlement System (FSS), or whether they retain self-employed status for income tax purposes.
The VAT treatment of supply Directors
In practice, there may be scenarios in which the individual holding office (i.e. the Director) is not remunerated directly, and in his/her own name, for the said activities – for example:
- Where a Corporate Services Provider or other service provider makes available, to its Client Company, an individual to sit on the Board of Directors of the Client Company; or
- Where a Director’s remuneration is paid to another company of which the Director is a shareholder. It is understood that past local practice has been to consider the fees paid in both the above-mentioned scenarios to fall outside the scope of Malta VAT, on the basis that the said fees constitute remuneration for an activity which is not to be considered to be an economic activity for VAT purposes i.e. that of the ‘holder of an office’.
However, in particular pursuant to the decision of the CJEU in case C-94/19 (San Domenico Vetraria SpA vs Agenzia delle Entrate), it is our understanding that the aforementioned interpretation shall no longer apply. Accordingly, in the above-described scenarios, the activity in question, for which a Company is being remunerated for making available to another Company the services of a Director, would in fact constitute an economic activity, which falls within the scope of VAT. In other words, where Malta Company A makes available to Malta Company B an individual to sit on the board of Directors of Malta Company B, for a fee, Malta Company A should be regarded as supplying a service to Malta Company B, which service is in principle subject to VAT at 18%. Where the individual in question is an employee of Malta Company A, the service would constitute a (taxable) supply of staff.
The CJEU, in its judgement in case C-94/19, reaffirmed that the lending or secondment of staff by one company to another constitutes a (taxable) supply of services for consideration falling within the scope of VAT. This case was brought before the CJEU in view of a provision of Italy’s VAT legislation (Article 8(35) of Law No 67/88) in terms of which, the secondment of staff by one company to another for a fee corresponding to the costs incurred for the seconded staff, fell outside the scope of VAT. The case concerned the secondment of an employee (a Director) by one company, Avir, to a subsidiary, San Domenico Vetraria, for which Avir invoiced San Domenico Vetraria for amounts corresponding to the costs incurred for the seconded employee. San Domenico Vetraria applied VAT to the amount reimbursed and then exercised its right to deduct that VAT. The tax authorities took the view that those reimbursements fell outside the scope of VAT since they did not concern supplies of services between the parent and its subsidiary, and denied San Domenico Vetraria’s input tax claim.
The Italian Court acknowledged the specific provision of Italian legislation which excluded such reimbursements from VAT; however, it expressed doubt as to whether the secondment of staff should fall outside the scope of VAT and referred the matter to the CJEU. The CJEU found that the secondment was carried out on the basis of a legal relationship of a contractual nature between Avir and San Domenico Vetraria, in the context of which there was reciprocal performance, namely the secondment of a director from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other. It furthermore maintained that if it were to be established (which it held was for the referring court to ascertain) that the payment by San Domenico Vetraria of the amounts invoiced to it by its parent company was a condition for the latter to second the director, and that the subsidiary paid those amounts only in return for the secondment, it would have to be held that there is a direct link between the two.
On this basis, the court held that the transaction should be regarded as having been carried out for consideration and subject to VAT, maintaining that the amount of the consideration – in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service – is irrelevant.
Services of Corporate Directors
Where a Director of a company is a body corporate, it is our understanding that the activities carried out by the said corporate Director are regarded as activities falling within the scope of VAT. A corporate Director, in the exercise of its functions, would in our view, be regarded as carrying out an economic activity and would therefore classify as a taxable person for VAT purposes. The exclusion of the activities of the holder of an office in Article 5 of the VAT Act specifically refers to an ‘individual’, and therefore a corporate director cannot be regarded as an ‘employee’ for the purposes of the said Article 5. This reflects the unanimous view of the VAT Committee that “services supplied by a legal person as a member of a company’s board of directors should be regarded as economic activities carried out independently within the meaning of Article 4(1) and (2) [now Article 9 of Directive 2006/112] and that they should therefore be subject to VAT” (Guidelines from the 53rd Meeting of 4-5 November 1997).