Luxembourg court ends VAT saga on director fees: key dates and new Circular 781-2 explained

1. 2016: Director fees are subject to VAT, says Circular 781

On 30 September 2016, the Luxembourg VAT authorities clarified the VAT treatment of director fees by releasing Circular 781.

In this circular, the Luxembourg VAT authorities 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 were 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.

2. 2022: The position of the Luxembourg VAT authorities is challenged and the case is referred to the CJEU

The challenge came from a lawyer based in Luxembourg, who acted as a member of the board of directors of several public limited companies incorporated under Luxembourg law and decided not charge VAT on his fees for his directorship activity.

In the context of an audit, the Luxembourg VAT authorities considered that the activity carried out by the lawyer should be subject to VAT, as it was related to an “economic activity” as defined by the EU VAT directive (i.e. an activity 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 their 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 their activities in their own name, on their own behalf and under their own responsibility, and where they bear 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.

The case was brought before the Luxembourg court, which took the view that no similar situation has been submitted to the CJEU before and, therefore, requested the EU court to issue its preliminary ruling on this subject-matter. In particular, the following questions were asked 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?”

3. 2023: The CJEU rules in favour of the taxpayer – The Luxembourg VAT authorities immediately react

On 21 December 2023, the CJEU released its judgement in TP v. Administration de l’Enregistrement, des Domaines et de la TVA (C-288/22), in favour of the director.

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 was reached by the CJEU mainly because the director did not assume any risk personally from their position on the board. The CJEU's decision therefore implied 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 was 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 they sit at the board or even depending on how the activity of board members is organised.

The case was referred to the Luxembourg tribunal, who had to take into consideration the interpretation and criteria set by the CJEU to give a conclusion in the TP case.

Immediately after the ruling from the CJEU, the Luxembourg VAT authorities released Circular 781-1 on 22 December 2023 to suspend the effects of Circular 781 from 2016 until the judgement from the Luxembourg tribunal. They also indicated that the regularisation process would be detailed in a circular to be published after the local judgement is released.

For further detail, we refer to our previous publication.

4. 2024: The judgement from the Luxembourg tribunal

On 22 November 2024, the Luxembourg tribunal released its long-awaited judgement (2024TALCH03/00180, n°TAL-2021-01422) on the VAT status of directors.

The judges analysed several criteria to conclude that the director in the case at stake was not acting independently for VAT purposes and therefore was not required to apply VAT to his services.

The criteria analysed by the tribunal are:

1. Provision of services for consideration

The tribunal first examined whether the director provided services to the companies as a member of the board of directors and whether these services were provided for consideration. It was established that the director did provide services to the companies.

•  Where the director received fixed sums, it was established that the services are rendered for consideration.
• Where the director received tantièmes for these services, the tribunal reached the same conclusion as, in the case at stake, the tantièmes did not vary over the years.

2. Character of permanence of the services and consideration

The tribunal assessed whether (i) the activity had a permanent character and (ii) the method to determine the remuneration was predictable. It was determined that the taxpayer's role as a board member, appointed for a renewable six-year term, conferred a permanent character to the activity. The remuneration, whether fixed or based on profits, also had a permanent nature.

Based on the two conditions set above, in line with the CJEU, the tribunal concluded that the director was carrying out an economic activity for VAT purposes.

3. Independence of the activity

The tribunal then evaluated whether the economic activity was carried out independently. Several factors were considered:

• Freedom in work execution: the director organised the execution of his work freely, without being subject to specific working hours or locations.
• Receipt of emoluments: the director received the emoluments directly, which constituted his income.
• Absence of hierarchical subordination: the director was free to submit proposals and vote within the board without hierarchical subordination.
• Responsibility and economic risk: The tribunal examined whether the director acted on his own behalf and under his own responsibility. It was found that, according to Luxembourg corporate law, board members do not assume personal obligations for the company. The primary responsibility for decisions taken by directors and their economic consequences rested with the company, not the individual board members (with the exception of a breach of law or articles of incorporation). The tribunal highlighted that the economic risk associated with the activity was borne by the company, not by the director. The company faced the consequences of the board's decisions, and the director did not bear personal economic risk related to his role as a board member.

The tribunal concluded that because of the absence of responsibility and economic risk borne personally by the director, his economic activity was not carried out independently and therefore he did not qualify as a VAT taxable person with respect to his directorship activity.

Further to the release of the judgement, a parliamentary question was raised to the Minister of Finance, asking (i) if the ruling of the Luxembourg court will be applied to all directors, regardless of the legal form of the company and (ii) how the decision will be implemented in the national VAT legislation. To this date, no response has been provided.

Following the judgement from the Luxembourg tribunal on 22 November 2024, the Luxembourg VAT authorities published a Circular 781-2 on 11 December 2024 to detail the regularisation process, for directors and companies, regarding VAT that was unduly charged on director fees. As per the new circular, it is the responsibility of each director to assess if they qualify as a VAT taxable person or not depending on the criteria listed by the Luxembourg tribunal (see above).

It must be noted that the VAT authorities

1. waive the statute of limitations for the year 2018, therefore corrections can be done as from that year,
2. waive the statute of limitations for the year 2019, provided that the director submits the regularisation request before 1 July 2025,
3. confirm that they do not intend to limit the consequences of the European and local judgements to directors of limited liability companies (sociétés anonymes),
4. indicate that the regularisation process can be done by directors who are or were VAT registered in Luxembourg, whether they are individuals or companies.

The reasoning from the Luxembourg tribunal should in principle apply to directors of public limited companies (SAs) but also to managers of private limited companies (SARLs). Both act under a corporate mandate granted by the company, as defined in Article 441-9 of the Commercial law. Under this mandate, their actions are considered acts of the company itself, not their own. As long as they act within the limits of their mandate, only the company should be held liable. This principle should also apply to members of management or supervisory boards under Article 442-10 of the Commercial law.

The features of the procedure are described below for each situation. These are general comments based on information made available by the VAT authorities in Circular 781-2 and during discussions with professional associations. The regularisation actions to be taken should also be reviewed on a case-by-case basis. Personal tax implications may also have to be assessed.

In addition, it is recommended for each director to confirm with their clients whether the latter want to receive the VAT refund or not. Some clients may not want to receive any refund as they would consider the amount at stake as being immaterial and involving more administrative burden on their side, notably in terms of adjusted the previously recovery input VAT.

1. You are a company

a. With a director established outside of Luxembourg

The Luxembourg VAT authorities confirmed that a company that paid director fees to non-resident directors, may regularise the Luxembourg VAT that was reverse charged since 2018 in their next annual VAT return (i.e. 2023 annual VAT return for companies with a filing deadline on 31 December 2024 that did not file their return yet, 2024 annual VAT return for other companies).

In case the company recovered, in full or partially, the reverse charge VAT on director fees, the VAT recovery will also have to be rectified in the next annual VAT return.

The company should attach to its annual VAT return an appendix showing the rectifications for each year and each director, as well as the proportion of input VAT recovered for each year.

The VAT recovery adjustment will have to be declared in part III, section C of the annual VAT return form (“Adjustment of deductions”).

Considering the situation, there should be no obligation to request from the non-resident directors (established in the EU) to correct their past European Sales Listings of services.

b. With a director established in Luxembourg

1. Regularising under the standard procedure

The company will report in its VAT returns the credit notes issued by the director and the new invoices issued without VAT.

The company will be refunded by the director by effect of the credit notes.

Per standard rules, the company may have to make adjustments on the input VAT initially recovered on the original invoices.

2. Regularising under the simplified procedure

The director will be in charge of submitting a regularisation request via MyGuichet, until 30 June 2025.

There are five steps to be completed on the platform for the regularisation procedure:

1. Protection of personal data.

2. Information related to the director (country of residence and indication whether the director is only VAT registered for directorship activities meeting the conditions of the case law or also for other activities. If the first option is chosen, the director will be automatically de-registered from VAT going forward). Other information needs to be provided such as: name, address, bank account references, VAT number, phone number and email address.

3. Years for which VAT needs to be adjusted.

4. Data related to the VAT to be adjusted per year and per client: name of the client(s), VAT number if applicable, amount charged excluding VAT, VAT amount charged and VAT payable balance of the director for the concerned year.

5. Commitment of the declaring person.

The director will be responsible for refunding VAT received from the VAT authorities to the company.

The company should receive a letter from the VAT authorities informing it of the submission by a director of a request for reimbursement of the unduly levied VAT on directors’ fees on MyGuichet.

Following receipt of the letter, the company will have to make an adjustment in its next annual VAT return of the input VAT recovered on director fees for all relevant years (as from 2018).

The company should attach to its annual VAT return an appendix showing the rectifications for each year and each director, as well as the proportion of input VAT recovered for each year. The company should be able to provide the invoices initially issued by the director in the event of a request or audit from the VAT authorities.

The VAT recovery adjustment will have to be declared in part III, section C of the annual VAT return form (“Adjustment of deductions”).

For companies that did not recover any input VAT on directors’ fees, they must inform the VAT authorities that no VAT recovery adjustment will be made in the annual VAT return.

Once the company receives the letter from the VAT authorities, it is its responsibility to ensure that the director actually refunds the amount of VAT that they receive from the VAT authorities.

2. You are a director

a. Established outside of Luxembourg

Directors established outside of Luxembourg charging director fees to Luxembourg companies will not have to take any corrective actions.

In principle the directors will not be required to correct their European Sales Listings of services to cancel the amounts of directorship services reported in the past.

b. Established in Luxembourg

1. Regularising under the standard procedure

Under the standard procedure, the director will issue credit notes to the company and new invoices without Luxembourg VAT.

The VAT initially charged by the director will be refunded to the company by effect of the credit notes.

The director should also adjust their VAT returns to obtain the refund of the unduly charged VAT.

2. Regularising under the simplified procedure

The director, or their service provider appointed under a proxy, will submit a request via MyGuichet for the reimbursement of the unduly levied VAT. This simplified procedure via MyGuichet is only available until 30 June 2025.

The director will be responsible for refunding the VAT obtained from the VAT authorities to their clients.

The VAT authorities will send a letter to the company to inform them of the request, and the director should also inform the company of the request.

Once the letter is sent, it will be the responsibility of the company to ensure that the director actually refunds to the company the amount of VAT that they receive from the VAT authorities.

The director will not be required to adjust the input VAT recovered in their past VAT returns for “normal” expenses used for the needs of directorship activity. However, for expenses of a significant amount, such as capitalised/investment expenses, the VAT authorities will systematically analyse the situation and potentially adjust the input VAT initially recovered.

3. Specific cases

a. Luxembourg director who is VAT de-registered

The VAT authorities confirmed that a Luxembourg resident director who has de-registered for VAT will still be able to submit a refund request via MyGuichet.

b. Inability to recover the unduly paid VAT (cessation of activity, death, etc.)

There may be cases where a company is not able to obtain reimbursement of the unduly paid VAT to a director due to specific circumstances, such as a cessation of activity or death of the director or the director’s unwillingness to submit the request for reimbursement or to issue credit notes.

In such cases, the company will have to make a formal and motivated claim to its tax office to request the reimbursement of the VAT that was unduly levied by the director.

The following conditions will apply to such claim:

• Timing of the claim: the request must be introduced within a reasonable period of time (i.e. once the majority of the request for regularisation have been submitted by directors);
• Exhaustivity of the claim: the request must include all the amounts not recovered by the company, for all directors and years concerned (i.e. no multiple isolated claims);
• Evidence of due diligence: the company will have to evidence that it has taken the necessary actions to encourage its directors to submit a reimbursement request by themselves.

In the event of death of a director, their heirs will be entitled to submit a refund request via the simplified procedure (MyGuichet).

c. Director operating through a company

The position detailed by the VAT authorities in the circular letter is not restricted to private individuals but also applies to companies. We recommend that directors operating through a company perform a similar assessment as directors who are private individuals. As several operating models (which could be seen as going beyond the provision of stand-alone directorship services) exist in practice, a case-by-case analysis should be performed.