On 7^th October the Tax Department has issued circular 205, which modifies circular 151 in regards to the Value Added Tax (VAT) treatment for persons being appointed as directors or other officers in Companies. The purpose of the revised circular, is to clarify the cases where the appointment as director or other officer does not constitute an economic activity and hence is exempt for VAT purposes.

Such cases are listed below:

1. Acceptance of a position on purely personal grounds i.e. personal merit, professional experience, expert knowledge and expertise or social status.
2. If the position is non-connected to the trade or profession of the appointee i.e. the appointment is not made for the promotion of any profession or any commercial activity.
3. A person who offers no other professional services further the duties expected from the board of directors.
4. Retired persons who do not provide any professional services beyond the duties expected from the board of directors.
5. Individuals who are employees of the Company.
6. Appointment in a position in a banking institution based on the Central Bank of Cyprus’ directive to licensed credit institutions on the evaluation of the capacity and suitability of the members of their directors and administrative body.

In the revised circular the Tax Department further clarified that:

1. The appointment of an employee or board member of Company A in Company B, constitutes a taxable activity for VAT purposes, hence Company A should charge VAT at the standard rate.
2. In case where a person is appointed as director in various companies and the remuneration to the director is being paid by one company, which then recharges those fees to the other companies, it was confirmed that there is no provision of services between the Companies, therefore no VAT should be charged between the companies.
3. In case where a board member or employee arranges voluntarily for his or her appointment in a second company and receives remuneration from this company, the first company does not have obligation to charge VAT in regards to the payments made from the second company to the appointee. It was further clarified that in case that the consideration received by an individual exceeds the VAT registration threshold of EUR 15,600, the individual will be required to register for VAT and charge VAT on the services provided.
4. In case where an investor/shareholder (natural or legal person), as per his or her legal rights, appoints a board member not providing specialized advice and not being actively involved in the management of the Company, then it is deemed that there was no transaction for VAT purposes and any remuneration/fee paid, is deemed as a transaction outside the scope of VAT.

It was also emphasized that in the event that a lawyer, accountant or other professional is appointed as a director, treasurer or secretary of a company and continues to practice his or her profession or participate in any other economic activity after being appointed, then such services constitute an economic activity which is subject to VAT.

As you may appreciate, the above may have an impact for companies involved also with exempted activities for VAT purposes, hence input VAT charged from the directors or other officers, might not be recoverable in total.