The Luxembourg indirect tax administration is reported to have confirmed that director fees are subject to VAT. This is in line with the Luxembourg VAT law and the position of the European Commission on this matter.
The public press reports that the director of the Luxembourg indirect tax administration (Administration de l’enregistrement et des domaines) has confirmed that independent director fees are subject to VAT. This (informal) confirmation seems to have been made further to discussions between the Ministry of Finance and the Luxembourg association for company directors (ILA).
Although this position seems to have come as a surprise to some actors, it is, in our view, fully in line with the Luxembourg VAT rules and the position of the European Commission on this matter. Based on article 4 of the Luxembourg VAT law, "any person who carries out in an independent and usual manner any economic activity, whatever the purposes or results of that activity" qualifies as a taxable person for VAT purposes. Independent directors therefore clearly fall within the scope of the Luxembourg VAT rules, such that their fees should be subject to VAT at the current rate of 17%. To the best of our knowledge, there is no case law from the Court of Justice of the European Union dealing with the VAT treatment of director fees. However, the European Commission has always taken the view that company directors are VAT taxable persons. Indeed, in 2011, the European Commission requested the Netherlands to change its VAT rules to ensure that company directors are treated as VAT taxable persons even in the case of a single corporate mandate (under the former Dutch VAT rules, company directors were not VAT taxable persons if they held less than five positions in supervisory boards).
In practice, this will have a significant impact on directors and companies who previously took the view that director fees are not subject to VAT. The directors should register for VAT purposes, issue invoices and file VAT returns in accordance with the requirements of the Luxembourg VAT law. Although the director of the Luxembourg indirect tax administration has reportedly stated that its administration would be lenient for the years prior to 2015, non-compliant directors should also consider regularising their past VAT compliance as far as necessary. For companies that are not VAT taxable persons or that have no VAT deduction rights, the VAT invoiced by directors would be a final cost. Companies and their directors should also consider reviewing their agreement to clarify whether the agreed remuneration is exclusive or inclusive of VAT.
Please finally note that the direct tax treatment of director fees remains unchanged:
•Director fees paid as a consideration for the daily management of the company are treated as salary income for Luxembourg income tax purposes and would therefore be deductible at the level of the company. The company will be responsible to withhold income tax in accordance with the withholding tax rates applicable to salary income.
•Director fees that are not paid as a consideration for the daily management of the company are treated as income from an independent profession for Luxembourg income tax purposes and are not tax deductible at the level of the company. The company is responsible to deduct a 20% withholding tax on the gross amount of such director fees.