The SAC: Are statutory representatives liable to VAT?

The SAC considered a case in which a statutory representative of a limited liability company invoiced his services including VAT. The tax authority rejected the company’s entitlement for VAT deduction arguing that the statutory representative’s services represented employment.

Pursuant to the EU VAT Directive, persons liable to VAT are persons who independently carry out economic activities. The SAC concluded that, under the Court of Justice of the EU’s case law, in order to assess the autonomous nature of an economic activity it is vital to decide whether the respective person’s relationship with the company is on a subordination basis. To assess this, it is necessary to consider whether the person carries out an activity in their own name, on their own account and on their own responsibility as well as whether the person bears any economic risks associated with exercising their offices. The SAC stated that it is mainly important to assess whether the person bears their own economic risks when carrying out the office and whether the person is liable for any potential damage incurred during the performance of the office. 

The SAC held that, pursuant to effective Czech private-law regulations, the statutory representative of a limited liability company represents the company by acting on its behalf and on its account while the company itself bears responsibility. In addition, however, the SAC also lists potentially negative effects that may be associated with the performance of an office as statutory representative, summarising that statutory representatives bear their own rather substantial economic risk when exercising their offices. According to the court, statutory representatives are not subordinate in relation to the company and, most of all, do not perform their activities following the company’s instructions. 

The SAC concluded that the performance of an office of a statutory representative for a consideration is an autonomous economic activity. Also, the explicit exclusion of the activities performed by the statutory representative as an individual (natural person) from the VAT system would result in an unacceptable inequality in the VAT regime applied depending on whether the statutory representative is a natural or a legal person, as under the Czech VAT Act, statutory representatives as legal persons (corporate entities) are not excluded from the scope of persons liable to VAT. The SAC voiced the opinion that the EU VAT Directive had been incorrectly transposed to Czech legislation. As a result, relevant provisions of the EU VAT Directive defining persons liable to tax (Articles 9 and 10) have a direct effect here and, therefore, the company at issue is entitled to VAT deduction on input.

Owing to the fact that the current wording of the Czech VAT Act excludes activities subject to income tax on employment from the group of independently carried out economic activities, the tax administrator may neither challenge the opposite procedure when statutory representatives do not invoice their services including VAT and do not consider themselves persons liable to VAT under the Czech VAT Act.

We recommend monitoring the future reactions of legislators and the financial administration to this judgment and adapting the VAT regime applied to remuneration paid for the performance of an office as statutory representative to have it take into account any changes in Czech legislation, related interpretations and practical applications.