Newsflash: Directors’ fees are not subject to VAT in Luxembourg

On 22 November 2024, the Luxembourg District Court (the Tribunal) has issued a judgment (2024TALCH03/00180) following a preliminary ruling by the Court of Justice of the European Union (CJEU) issued on December 21, 2023 (C-228/22). This decision confirms and applies the CJEU's interpretation of the VAT treatment applicable to directors' fees.

Background and preliminary questions

The Tribunal sought the CJEU's interpretation on two key issues concerning directors of public limited liability companies (sociétés anonymes) governed by Luxembourg law:

1. Whether the activity carried out by these directors constitutes an "economic activity" within the meaning of Article 9 of the VAT Directive.
2. Whether this activity is carried out "independently."

For further information on the CJEU's decision please refer to our autumn newsletter here: Autumn Newsletter - Simmons Lux insights

Key takeaways from the Tribunal's decision

Economic nature of the activity

The Tribunal upheld the CJEU's criteria that a director's activity qualifies as economic under article 9 of Directive 2006/112/EC if:

1. The services are supplied against consideration: Directors perform services such as participating in board meetings, decision-making, and supervising company operations, which are effectively remunerated.
2. The remuneration is predictable: Compensation, whether fixed fees or "tantièmes", must be directly linked to these services, reflecting a structured exchange for payment.
3. The activity is permanent: The Tribunal highlighted the requirement for permanence of directorships (in the case at hand lasting for renewable terms of up to six years), further evidenced by regular compensation independent of company profits.

The Tribunal concluded that the activity in question satisfied the conditions for being considered as of  "economic" nature.

Independence of the activity

Under the VAT Directive, an activity is deemed independent if the individual organizes its work freely, receives the emoluments constituting its income personally, acts in the absence of any subordination link, acts in its own name and responsibility and bears significant economic risk. The Tribunal, aligning with the CJEU, concluded that directors do not meet the independence criterion as they do not act under their own responsibility and do not bear personal economic risk. The economic risk arising from the board's decisions is borne by the company itself, not by the individual directors, regardless of their role in the decision-making process. Thus, their remuneration—whether fixed or profit-based—does not involve personal financial losses or expose them to entrepreneurial risks.

Given these factors, the Tribunal ruled that the directors' activity, while being of economic nature, did not meet the independence criteria required to be subject to VAT.

Impact of the decision

This decision confirms that directors who act exclusively within the framework of a collegial governance body, without personal economic risk, are not subject to VAT for these activities.

The ruling not only aligns with the CJEU's interpretation but also provides legal certainty and guiding compliance for both directors and companies.

Implications

Following the Tribunal's decision, the Luxembourg VAT Administration issued Circular N°781-2 on 11 December 2024.

The key points of the Circular include:

• Scope: while the decision only targeted directors of sociétés anonymes, the Circular confirms that it applies to all directors to the extent that they meet the same criteria.

• Regularization for previously registered directors:

  • Directors currently identified as VAT taxpayers who do not act independently may ask for a VAT regularization for non-prescribed years, including 2018 and 2019.
  • A simplified procedure will be available on MyGuichet.lu until 1 July 2025.

• VAT refund obligations: Directors must refund any regularized VAT to their clients, who may need to adjust their VAT deductions for the corresponding years.

• Deductions for business expenses: The tax authorities will generally not challenge directors' input VAT deductions for routine expenses related to their roles. However, significant investments will be systematically reviewed.

• Impact on non-resident directors: non-resident directors are not allowed apply the decision at their level. With non-resident directors, the client company remains responsible for amending the VAT returns for the relevant years.

This judgment reinforces the importance of understanding the nuances of VAT legislation as applied to corporate governance roles. Directors and companies are encouraged to review their VAT obligations in light of this decision to ensure compliance going forward.