Director fees are not subject to VAT according to the CJEU

Are directors' fees subject to VAT? This is the tricky equation the CJEU ¹ tried to solve in its decision dated 21 December 2023 in TP vs. Administration de l'enregistrement, des domaines et de la TVA (C-288/22).

For the CJEU, the answer is no. The decision follows the opinion of Advocate General Kokott, which took the view that the activities of directors do not constitute an independent economic activity under the VAT Directive.

For years, this issue has been at the heart of heated discussions over opposing positions. The Luxembourg VAT authorities clarified the treatment of directors' fees in 2016 by issuing a circular ² , confirming that these fees were subject to VAT. The reasoning behind this is that directors/board members carry out an economic activity, "independently", therefore falling within the scope of the VAT rules.

With this recent CJEU decision, and the crucial interpretation of the concept of "independence", there is no doubt that the impact will be wide-ranging, and not only for board directors.

Background of the case

TP is a lawyer and member of the board of directors of several Luxembourg-based public limited companies. He received a tax assessment from the Luxembourg VAT authorities (the VAT Authorities) determining that the directors' fees he received in 2019 were subject to Luxembourg VAT. He lodged an appeal against this assessment.

Addressing the appeal filed by TP, the Luxembourg VAT Authorities confirmed their position in a decision dated 23 December 2020: the Luxembourg VAT Authorities took the view that a member of a company's board of directors carries out an independent economic activity, in consideration for the payment of remuneration for the services provided. In the case at hand, TP was appointed for a period of six years and his remuneration was decided upon by the general meeting of the shareholders of the Luxembourg public limited company. Hence, VAT has to apply.

On 26 January 2021, TP introduced an annulment appeal in front of the Luxembourg district court. TP held the view that the remuneration received as a board member should not be subject to VAT, arguing that his activities were not carried out independently but rather as a member of a collegiate body representing the corporate legal person. According to TP, the collective service provided by the board was therefore deemed to be provided by the company itself.

The Luxembourg district court decided to stay the proceedings and to refer the following questions to the CJEU for a preliminary ruling:

• Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out an 'economic' activity within the meaning of article 9 of the VAT Directive, and more specifically, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?

• Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out his or her activity "independently", within the meaning of Articles 9 and 10 of the VAT Directive?

In her opinion delivered on 13 July 2023, Advocate General Kokott concluded in that respect that "the existence of an independent economic activity must be determined by means of a typological comparison. The decisive factor in that regard is whether, in the context of the necessary overall assessment, the person concerned, as a typical taxable person does, bears an economic risk personally and acts on his own economic initiative, which it is for the referring court to ascertain. In that regard, it follows from the principle of neutrality of legal form that a natural person who is a member of a body of a company which is required by law and who receives remuneration for that activity as a member of that body cannot in this respect be regarded as carrying out an independent economic activity".

CJEU position

The CJEU confirmed that the activities of board directors (such as TP) constitute economic activities.

The CJEU also stressed that these activities are not necessarily carried out independently.  

The decision explains that such activity of a member of the board of directors of a Luxembourg public limited company under Luxembourg law is not carried out independently, "where, despite the fact that that member is free to arrange how he or she performs their work, receives the emoluments making up his or her income, acts in his or her own name and is not subject to an employer-employee relationship - he or she does not act on their own behalf or under their own responsibility and does not bear the economic risk linked to their activity”. ³

In doing so, the CJEU points out that the nature of a board director's role is intrinsically tied to the collective functioning and representation of the company, rather than an independent pursuit. Therefore, despite the permanence and remuneration associated with their roles, board directors do not fulfil the independence criterion required for VAT liability so that their activity is not subject to VAT.

Key take-aways

This judgment is significant as VAT has consistently been applied on directors' fees in Luxembourg.

The Luxembourg VAT Authorities have already communicated that, as soon as the Luxembourg district court lifts the stay on proceedings and issues its decision in light of the CJEU outcome, they would ensure the regularisation of the Luxembourg VAT previously paid by directors within the statute of limitation period - hence, undue paid VAT will be reimbursed.

They also mentioned that a detailed circular will be issued at that time.

More importantly, the CJEU is interpreting the "independence" criteria in the light of the personal liability and economic risks which are taken - not only on the absence of a subordination link for instance.

The consequences of this decision will doubtless have a far wider impact on the correct application of VAT rules in contexts where the satisfaction of the independence criterion has previously been assumed.

On 15 January 2024, the Luxembourg VAT authorities issued a statement to share practical aspects regarding the VAT refund mechanism

To obtain a refund, any person affected by the CJEU decision will need to issue amended invoices to the company receiving the board members' services. Therefore, it will be up to the taxpayer to justify to the Luxembourg VAT authorities his right to obtain refund of the VAT wrongly collected.

The amount of VAT refunded will be limited to the portion overpaid during the years for which the statute of limitation has not yet expired. Normally, any right to a tax refund is time-barred five years after 31 December of the calendar year to which the tax to be refunded relates. Exceptionally, the Luxembourg VAT authorities have decided to waive the application of the statute of limitation for the 2018 tax year (since the CJEU decision was not handed down until 21 December 2023).

It should be noted that this communication from the Luxembourg VAT Authorities mainly deals with the principle of the refund mechanism and the fact that the CJEU decision has a retroactive effect, but it does not address all consequences that derive from the CJEU decision. 

For example, if directors' services are no longer subject to VAT, directors will no longer be entitled to deduct VAT incurred by them which relates to the services they render. One might therefore wonder what will happen to the input VAT they have deducted since 2018, but the Luxembourg VAT Authorities' statement is silent on this matter. In principle, it seems likely that any such input VAT which has been recovered will need to be  repaid, but the method of such repayment is not dealt with in the Luxembourg VAT Authorities communication. This may also be a concern for companies which have paid and recovered VAT on such directors' fees.

There are also pending questions regarding the VAT treatment applicable to fees paid to non-resident directors (and notably regarding the impact on the reverse charge mechanism).

The detailed administrative circular that the Luxembourg VAT authorities have promised to issue (most probably after the local courts have delivered their decision) will hopefully cover the remaining issues and provide better clarity on the VAT treatment of directors' fees not only going forward, but also for past years subject to the statute of limitation.

In this regard, the Luxembourg VAT Authorities have also announced that they plan to introduce a system for the regularisation of the VAT position for directors. This  system will be implemented via a specific online procedure, accessible in due course via myGuichet.

¹ Court of Justice of the European Union.

² N°781 dated 30 September 2016.

³ Our emphasis.