Flashback on ECJ Cases – C-355/06 (van der Steen) – An individual who is the sole shareholder and sole director of a private limited company is not a taxable person

On October 18, 2007, the ECJ issued its decision in the case C-355/06 (van der Steen).

Context: Sixth VAT Directive – Independent economic activity – Private limited company – Company’s activities carried out by a natural person as sole director, sole shareholder and sole member of staff

Article in the EU VAT Directive

Article 4(4) of the Sixth VAT Directive (Article 9, 10 and 11 of the EU VAT Directive 2006/112/EC).

Article 9 (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
2. In addition to the persons referred to in paragraph 1, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

Article 10
The condition in Article 9(1) that the economic activity be conducted ‘independently’ shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

Article 11
After consulting the advisory committee on value added tax (hereafter, the ‘VAT Committee’), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.
A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.

Facts

Until 6 March 1998, Mr van der Steen ran a one-man business providing cleaning services, in which capacity he was a trader within the meaning of the Turnover Tax Law.
From 6 March 1998, the appellant became the director and sole shareholder of the private limited company established on 4 July 1991, J.A. van der Steen Schoonmaakdiensten BV (‘the company’), which took over and continued the business previously carried on by the one-man business. The company was as such an undertaking within the meaning of the Turnover Tax Law.
Mr van der Steen had concluded a contract of employment with the company under which he received a fixed monthly salary and an annual holiday payment of 8% of his yearly salary. The company deducted income tax and compulsory social insurance premiums from his salary. The company did not employ anyone apart from him.
When the company became insolvent, bankruptcy proceedings were commenced during December 2002 and the company was declared bankrupt on 5 January 2005.
It is apparent from the letter of 18 December 2002 that Mr van der Steen asked the inspector for a separate VAT number from that of his company so that he and his company would not form a fiscal entity within the meaning of the Turnover Tax Law.
By decision of 28 April 2004, the inspector decided that, with effect from 1 May 2004, Mr van der Steen and the company would constitute a fiscal entity within the meaning of Article 7(4) of the Turnover Tax Law. In support of his decision, he referred to judgment No 35 775 of the Hoge Raad der Nederlanden of 26 April 2002. Ruling on an objection, the inspector confirmed his position on 16 August 2004, citing a decision of the Staatssecretaris van Financiën (State Secretary for Finance) of 24 July 2002, based on that judgment.
Mr van der Steen brought an action against the inspector’s decisions before the Gerechtshof te Amsterdam, which points out that it is a prerequisite for those decisions that the appellant should qualify as a trader for the purposes of the Turnover Tax Law, but is uncertain whether such an assessment is compatible with Community law.
In the view of the Gerechtshof te Amsterdam it cannot be said that Mr van der Steen stands in the position of employee vis à vis the company. None the less, it asks whether, in applying the provisions of Article 7(4) of the Turnover Tax Law – which transpose the provisions of the second paragraph of Article 4(4) of the Sixth Directive into national law –, the appellant can be regarded as carrying out his work independently without however being regarded as independently carrying out economic activity within the meaning of Article 4(1) of the Sixth Directive.

Questions

Is Article 4(1) of the Sixth Directive ¹ to be interpreted as meaning that if a natural person has the sole activity of actually carrying out all work ensuing from the activities of a private limited company of which he is the sole manager, sole shareholder and sole ‘member of staff’, that work is not an economic activity because it is carried out in the course of the management and representation of the private limited company and thus not in economic dealings?

AG Opinion

A natural person who supplies services to a taxable person pursuant to a contract of employment is in that context not himself a taxable person within the meaning of Article 4(1) of Sixth Council Directive 77/388/EEC because he is not independently carrying out an economic activity. Such services are, on the contrary, excluded from the scope of VAT by virtue of Article 4(4) of the same directive. In that regard, it is immaterial whether the employer is a legal person of which the employee is also a shareholder and/or director, or even sole shareholder and sole director, provided that the two parties have separate legal personality with the capacity to enter into a contract of employment between them and have in fact entered into such a contract pursuant to which the services are supplied.

Decision

For the purposes of the application of the second paragraph of Article 4(4) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, a natural person carrying out all work in the name and on behalf of a company that is a taxable person pursuant to a contract of employment binding him to that company of which he is also the sole shareholder, the sole manager and the sole member of staff, is not himself a taxable person within the meaning of Article 4(1) of that Directive.

Personal comments/VATupdate

For the purposes of the second subparagraph of Article 4(4) of the Sixth Directive , a natural person who, in the name and on behalf of a taxable company, carries on all the activities of the latter in the performance of a contract of employment conferred upon him by that company of which he is, moreover, the sole shareholder, director and member of staff, is not itself a taxable person within the meaning of Article 4(1) of that directive.

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