The European Court of Justice ruled that, for the purpose of applying the second paragraph of art. 4(4) of Council Directive 77/388, a natural person carrying out all work in the name and on behalf of a company that was a taxable person, pursuant to a contract of employment binding him to that company, of which he was also the sole shareholder, the sole manager and the sole member of staff, was not himself a taxable person within the meaning of art. 4(1).

Facts

Until 6 March 1998, the taxpayer ran a one-man business providing cleaning services, in which capacity he was a trader. From 6 March, the taxpayer became the director and sole shareholder of a private limited company established on 4 July 1991, which took over and continued the business previously carried on by the taxpayer.

The taxpayer concluded a contract of employment with the company under which he received a fixed monthly salary and an annual holiday payment of 8 per cent of his yearly salary. The company deducted income tax and compulsory social insurance premiums from his salary and 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. The taxpayer asked the tax inspector for a separate VAT number from that of his company so that he and his company would not form a fiscal entity for VAT purposes.

The inspector decided that, with effect from 1 May 2004, the taxpayer and the company would constitute a fiscal entity. When the taxpayer challenged that decision, the national court referred to the European Court of Justice for a preliminary ruling whether such an assessment was compatible with Community law. Under art. 4(1) of the sixth directive, a taxable person was any person who independently carried out any economic activity specified in art. 4(2).

Issue

Whether, for the purposes of the second paragraph of art. 4(4) of the sixth directive, a natural person carrying out all work in the name and on behalf of a company that was 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, was himself a taxable person within the meaning of art. 4(1) of the directive.

Decision

The European Court of Justice (Second Chamber) (ruling accordingly) said that the first paragraph of art. 4(4) of the sixth directive stated that the word ‘independently’ excluded employed and other persons from the tax in so far as they were 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.

The second paragraph of art. 4(4) stated that member states, subject to the consultations provided for in art. 29, might treat as a single taxable person persons established in the territory of the country who, while legally independent, were closely bound to one another by financial, economic and organisational links. In a situation such as the present, the two persons concerned had a relationship of employer and employee.

While the company's cleaning services were carried out exclusively by the taxpayer, contracts for the provision of cleaning services were entered into by the company, which paid the taxpayer a fixed monthly salary and annual holiday payment. The company deducted income tax and social security contributions from his salary. Therefore, the taxpayer depended on the company to determine his remuneration. Further, the taxpayer, at the time of providing services in his capacity as employee, did not act in his own name, on his behalf and under his own responsibility, but on behalf and under the responsibility of the company. Finally, the Court of Justice had held that with regard to remuneration there was no relationship of employer and employee where the persons concerned bore the economic risk entailed in their activity (Ayuntamiento de Sevilla v Recaudadores de las Zonas Primera y Segunda (Case C-202/90) [1993] BTC 5,186; [1991] ECR I 4247, para. 13).

The national court made clear that the taxpayer did not bear any economic business risk in acting as manager and performing the work in the course of the company's dealings with third parties. It followed that an employee in the position of the taxpayer could not be considered to be a taxable person within the meaning of art. 4(1).

The parties agreed that even though the taxpayer was the only director and the sole shareholder of the company, he performed his work under a contract of employment. Since this case concerned only VAT and the definition of ‘taxable person’ in respect of VAT, the reasoning adopted by the court in earlier cases relating to the free movement of persons was not applicable (Asscher v Staatssecretaris van Financien (Case C-107/94) [1996] BTC 563; [1996] ECR I 3089 and Staatssecretaris van Financien v Heerma (Case C-23/98) [2003] BTC 5,041; [2000] ECR I 419 distinguished).

European Court of Justice (Second Chamber).
Judgment delivered 18 October 2007.