Background

At a first glance, it has to be recalled that in accordance with the Circular n° 781 dated 30 September 2016, the Luxembourg VAT authorities consider that the activity of a board member has an economic nature in relation to the delivery of services. Hence, the said board member falls under the definition of “taxable person” under Luxembourg VAT Law which triggers the application of a 17% VAT rate on directors’ fees paid by the company.

For the sake of completeness, a taxable person is considered as “any person who, independently and on a regular basis, in the course of a general economic activity, carries out transactions, whatever the purpose, results or place of that activity”.

Decision

On 21 December 2023, The Court of Justice of the European Union (CJEU) rendered its decision on the VAT treatment in relation to directors’ fees (case C 288/22) derived by an individual taxpayer acting as a board member of several public limited companies.

As per the arguments of the taxpayer, the directors’ fees received for his activities were not a remuneration for an independent economic activity in line with Luxembourg VAT law and Council Directive 2006/112/EC of 28 November 2006 since he did not perform such activities in an independent manner.

In light of the facts, the CJEU stated that despite the director carried-out an economic activity, he should not be considered as acting independently. The rationale of the CJEU mainly derives from the fact that the director does not personally and directly assume any risk or personal obligations with respect to its activity as board member, which is a key factor.

To assess the existence of an independent economic activity, the CJEU explained that several criterions under which the activity must be assessed, such as whether the individual was acting in his own name, on his own behalf or under supervision and was bearing the economic risk linked to his activity. Since this was not the case at hand, the CJEU considered that the individual did not act independently.

What’s Next

Further to the decision rendered by the CJEU, Luxembourg resident directors in a comparable situation in facts and circumstances should not be considered as a “taxable person” under Luxembourg VAT Law. As a result, no VAT should apply on directors’ fees paid by the company.

This decision provides a game changer in the Luxembourg VAT environment.

On 22 December 2023, the Luxembourg VAT authorities issued the Circular n° 781-1 that removes the application of the aforementioned Circular n° 781 until the decision to be rendered by the Luxembourg District Court (“tribunal d’arrondissement de Luxembourg”).

We would like to draw the attention to the fact that a case-by-case analysis must be performed to determine whether each director mandate does not meet the independence criterion of the CJEU judgment.

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