The general rule is that VAT applies to the supply of goods or services made by a “Taxable Person” acting as such, defined under Article 5 of the VAT Act (Chapter 406 of the Laws of Malta) as a person who carries on an economic activity. This brings us to the question – are Directors “taxable persons” and would their services therefore be subject to VAT?
Article 5 of the VAT Act (Chapter 406 of the Laws of Malta) expressly provides that while a taxable person is a person who carries on an economic activity, activities carried out by individuals acting as employees or office holders are excluded. Consequently, it is to be understood that individuals appointed as Directors or Company Secretaries of Companies, as office holders, would typically fall outside the scope of VAT – whether the Directors are employed by the Company or self-employed. However, when it comes to the VAT treatment of Directors’ services, the fact pattern at hand must be considered.
The fees paid by a Company directly to its Directors (in their own names) as a means of remunerating them for their activities or “services”, falls outside the scope of VAT. However, the VAT treatment changes in scenarios where a third party, such as a Service Provider, makes available to its Client Company an individual to sit on its Board of Directors, or where a Director’s remuneration is paid to another Company of which the Director is a shareholder. Under previous local practice, these transactions were considered outside the scope of VAT. This view was however overturned by the European Court of Justice (CJEU) in 2020 (Case C-94/19, San Domenico Vetraria SpA vs Agenzia delle Entrate). In its judgement, the CJEU 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, even if the fee is based on the costs incurred for the Director’s secondment. Hence, it is to be understood that when a Company is being remunerated for making available to another Company the services of a Director, this would constitute an economic activity which falls within the scope of VAT.
In summary, we may therefore outline the VAT treatment of Directors’ fees by distinguishing between the following three scenarios:
– Scenario 1: Where an individual is appointed to the Board of Directors of Company A and the individual issues an invoice for services rendered to Company A – this is outside the scope of VAT.
– Scenario 2: Where an individual is appointed to the Board of Directors of Company A and the individual’s company (Company B) issues an invoice for services rendered to Company A – this is subject to VAT as it is considered to be a supply of services by Company B to Company A.
– Scenario 3: Where an individual is referred by a Service Provider to sit on the Board of Directors of Company A, and the Service Provider issues an invoice (in its own name and for its own account) to Company A for the fees for the individual’s services – this is subject to VAT as it is considered to be a supply of services by the Service Provider to Company A.
Lastly, it is also worth distinguishing between individuals and legal persons appointed to sit on the Board of Directors of a Company. Where a Director of a Company is a legal person (a body corporate) and not an individual, the services supplied by said body corporate are considered to be activities falling within the scope of VAT. Hence, the exclusion from VAT of the activities of office holders in Article 5 of the VAT Act must be understood to specifically refer to individuals and not body corporates.
In conclusion, while Directors’ remuneration paid directly to an individual is generally outside the scope of VAT, where a third party makes a Director available to sit on the Board of Directors of another Company, or where a Director’s remuneration is paid to another company of which the Director is involved, VAT is chargeable. Moreover, while individuals holding an office are considered not to be performing economic activities with their services falling outside the scope of VAT, body corporates holding the same offices are regarded as taxable persons engaging in economic activities subject to VAT.