Director's fees: is it the end of a long VAT story?


In brief

Hot from the press! A member of the board of directors performs an economic activity but does not act independently for VAT purposes.

The Court of Justice of the European Union (CJEU) finally released its long-awaited decision on the Value Added Tax (VAT) treatment applicable to directors’ fees (case C‑288/22). The CJEU concluded that although a director in the circumstances of the case at hand would be seen as performing an economic activity, the latter would not be considered as acting independently. This conclusion is reached by the CJEU mainly because the director does not assume any risk personally from its position at the board. The CJEU's decision therefore implies that such a director would not be considered as a taxable person and VAT would not apply on the consideration paid by the company.

The reasoning of the Court is applied to a specific set of facts and circumstances and may therefore vary depending on the exact characteristics of a director’s mandate or on the legal form of the entity where he/she sits at the board or even depending on how the activity of board members is organised. We would recommend directors to review the conditions of their mandate to determine whether or not they would be impacted by the decision. It remains to be seen how the Luxembourg tribunal will decide on the referred case and how the Luxembourg VAT authorities will interpret this judgment.

In detail

Background and questions referred to the CJEU

The current VAT position (and generally accepted market practice) in Luxembourg is based on Circular 781 released by the Luxembourg VAT authorities on 30 September 2016. In this circular, the Luxembourg VAT authorities have stated that independent members of the board of directors are to be regarded as supplying services within the scope of VAT to the company on the board of which they are sitting, irrespective of whether the person receiving the remuneration is a company or a private individual. On this basis, director fees are generally subject to VAT in Luxembourg (with a few exceptions for investment funds and other honorary activities amongst others). The VAT position is however different in a number of other EU countries.

In the case submitted to the CJEU, a lawyer based in Luxembourg who acts as a member of the board of directors of a number of public limited companies incorporated under Luxembourg law is remunerated by way of a "percentage fee". The lawyer did not charge VAT on those fees.

In the context of an audit in relation to the lawyer's activities, the Luxembourg VAT authorities challenged the VAT treatment applied to fees received as remuneration for its directorship activity. The authorities understood that the activity carried out by the lawyer should be subject to VAT, as it is related to an “economic activity” as defined by the EU VAT directive (in particular, the authorities argued that this activity was from an i) economic nature, ii) permanent and iii) remunerated).

On the other hand, the lawyer argued that a member of a board of directors does not carry out his or her activity independently, but as a member of a collective organ which represents the legal person. In order to reinforce his argument, the lawyer referred to a previous CJEU’s decision (C- 420/18), in which the court ruled on the VAT treatment applicable to the activity of a member of a supervisory board of a foundation and concluded that such activity would only be considered “independent” if “the person concerned performs his activities in his own name, on his own behalf and under his own responsibility, and where he bears the economic risk associated with carrying out those activities”. The lawyer submitted that the economic risk associated with the activity of the members of the board as a collective body is borne by the company, and not by the director himself.

Disagreeing with the tax assessments issued by the VAT authorities, the lawyer appealed against the decision by filing a judicial claim with the tribunal d’arrondissement.

The Luxembourg tribunal d’arrondissement is of the view that no similar situation has been submitted to the CJEU in the past and, therefore, requested the EU court to issue its preliminary ruling on this subject-matter. In particular, the following questions are referred to the CJEU:

1) 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 and more specifically, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?

2) 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 the EU VAT Directive?

Reasoning of the CJEU

On 21st December 2023, the decision from the CJEU in this case was released. As a preliminary remark, the CJEU ruled on the specific circumstances of the case at hand and therefore excluded from its analysis a situation in which the director:

  • would have a casting vote within the boards of the public limited companies of which he was a member;
  • would assume the representation or daily management of the affairs of these companies; and/or
  • was part of a management committee in these companies.

Having stated that and in order to conclude on the VAT treatment applicable to directors’ fees, the CJEU considers that it is necessary to assess the situation following a 2-step approach:

1st – is the director performing an economic activity?

2nd – if yes, is this economic activity carried out independently?

On the 1st step, the CJEU indicated that an economic activity should be recognised if the director receives a predictable compensation for his services with a certain degree of permanence.

The CJEU indicated that the fact that the director’s mandate could be revoked at any time and with no motivation was irrelevant if the mandate already foresaw a certain duration (i.e. in the case at hand, a maximum of 6 years).

Additionally, the CJEU recognised that, like in the case at hand, it is common that directors’ fees would be paid only under the condition that a company was making a profit. This fact was brought by the defendant to demonstrate that the consideration received was not certain and therefore not predictable. However, the CJEU ruled that an economic activity would still be characterised as soon as the shareholders’ general meeting would be allowed to allocate a remuneration to the directors of the board even though the company would not be profit-making. The court also stated that a remuneration based on a lump sum that is decided upfront would not change this conclusion.

Hence even though each director’s situation might be different, it is likely that the criteria to the 1st step will be met in practice but this should be reviewed on a case-by-case basis.

On the 2nd step, the CJEU listed several criteria to determine if the director was effectively acting independently and followed the reasoning of the advocate general. In essence, the decisive factor to consider is whether the director bears an economic risk personally as a result of the mandate he received (i.e. he bears a risk of loss and profit personally).

The court states that in the situation of a public limited company, the director does not assume independently any risk. It is the body of members that is liable as per corporate law, and not the members personally. The court insists in saying that this is even more true if the shareholders’ general meeting agreed to remunerate the director even if the company was in a loss position.

The court therefore concluded that, in the case at hand, even though the director had no subordinate relationship with the company, he/she was still not acting independently and would therefore not be seen as a taxable person from a VAT perspective.

Conclusion and Recommendations

A reaction from the Luxembourg VAT authorities would be welcomed in order notably to void or amend the current circular letter. In addition, the case will be referred back to the Luxembourg district court and it remains to be seen whether the local decision will give further clarity as to the practical interpretation of the case.

In principle, based on the decision from the CJEU, directors should no longer be seen as carrying out an economic activity independently although we would still recommend reviewing the conditions of the directors’ mandate to confirm whether or not they would be impacted by the decision depending on their specific situation.

The immediate consequence of the decision is that Luxembourg VAT should no longer be due on directors’ fees when the criterion used by the court are met, while VAT is currently charged by Luxembourg directors or self-accounted by Luxembourg taxpayers under the reverse charge mechanism when the director is established outside of Luxembourg. There should however be no impact when the director’s fees were VAT exempt, in particular for board members of investment funds qualifying for the fund management VAT exemption based on article 44.1.d) of the Luxembourg VAT law.

The EU court's decisions, being interpretative, may impact the VAT treatment of transactions performed before the judgment date. The statute of limitation period for VAT matters is 5 years starting on 1st January of the year following the tax period. The current position is that no amendment can be made with respect to a period which has been assessed by the Luxembourg VAT authorities by way of the issuance of an information notice (bulletin d'information), an arbitrary VAT assessment notice (“bulletin de taxation d'office”) or a corrective VAT assessment notice (“bulletin de rectification”) except if a claim has been filed within three months from the notification date of the notices.

It is interesting to note that the Luxembourg VAT authorities created a precedent in that respect when they allowed companies to amend assessed periods within the statute of limitations for the problematic of the VAT treatment applicable to company cars. Opening the door to past adjustments could lead to many practical issues and, if made mandatory, could go against the principle of legitimate expectations considering the circular from 2016. Ideally, corrections should be allowed but only on a voluntary basis and could be limited to companies having a partial recovery right and which self-assessed Luxembourg VAT on directors’ fees paid to non Luxembourg-based directors. 

Luxembourg directors that are currently registered for VAT purposes may now consider filing a VAT deregistration application provided that they do not have any other economic activities and provided that they meet the conditions for not acting independently.

We would be happy to discuss the potential impacts of this judgment on your transactions and consider any specific actions to be taken.

Contact us

Marie-Isabelle Richardin

Tax Partner, VAT, PwC Luxembourg

Tel: +352 49 48 48 3009

Frédéric Wersand

Tax Partner, VAT, PwC Luxembourg

Tel: +352 49 48 48 3111

Stéphane Rinkin

Tax Partner, VAT, PwC Luxembourg

Tel: +352 49 48 48 2044

Chantal Braquet

Tax Partner, VAT, PwC Luxembourg

Tel: +352 49 48 48 4146

David Schaefer

Tax Partner, VAT, PwC Luxembourg

Tel: +352 49 48 48 3202