The Luxembourg District Court (le tribunal d’arrondissement) ruled on 22 November 2024 (case 2024TALCH03/00180) that a natural person acting as a director of a Luxembourg commercial company registered as a public limited company (“Société Anonyme” or “S.A.”) is not a taxable person for VAT purposes, because the services rendered by this person are not considered as an “independent economic activity” for VAT purposes. This decision confirms the ruling of the European Court of Justice (“CJEU”) of 21 December 2023 (case EU C-288/22). Now that the Luxembourg District Court has delivered its decision, the Luxembourg VAT authorities are expected to issue a new circular on the VAT treatment of director’s fees.

1. Background

According to the Circular No. 781 dated 30 September 2016, the Luxembourg VAT authorities considered, with tax effect from the tax year 2017, that services rendered by independent members of the board of directors would fall within the scope of VAT regardless of whether the directors acted as individuals (natural person) or through legal entities. Consequently, director’s fees were subject to Luxembourg VAT (with exceptions for investment funds) and directors had to register for VAT.

In the so-called “TP Case”, Mr TP, a Luxembourg taxpayer (a lawyer), who was a member of the board of directors of several public limited companies and received a percentage fee for that function, appealed to the Luxembourg District Court against the decision of the Luxembourg VAT authorities to apply VAT on the fees he received as a director before the Luxembourg district court. The Luxembourg District Court, which was unable to render a decision due to the lack of Luxembourg case law on that subject, therefore requested a preliminary ruling from the CJEU on the following two questions:

“(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 within the
meaning of Article 9 of the VAT Directive 2006/112/ EC (“VAT Directive”) 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 Articles 9 and 10 of the VAT Directive?”

The CJEU confirmed firstly that a member of the board of directors of a public limited company carries out an economic activity as long as he supplies remunerated services to the company and if his activity is permanent and exercised for a determinable remuneration. The CJEU however stated that a director of a public limited company does not personally assume an economic risk, but the company itself must bear the economic risk resulting from the activities of the members of the board of directors. Consequently, the CJEU decided that the lack of economic risk at the level of the director is a sufficient criterion leading to the conclusion that such director does not act independently.

Further to this ruling, the Luxembourg VAT authorities issued a new Circular n°781-1 on 22 December 2023 suspending Circular 781 with immediate effect, i.e. suspending the levy of VAT on director’s fees pending the decision of the Luxembourg district court. The Luxembourg VAT authorities have also waived the benefit of the statute of limitation for calendar year 2018 as part of the regularisation process for the unduly collected VAT on directors' fees and have indicated that a simplified regularisation procedure will be introduced as soon as possible.

2. The Decision

By confirming the CJEU ruling, the Luxembourg district court decided in the TP Case that the tax assessments issued by the Luxembourg VAT authorities should be cancelled and that unduly collected VAT should be refunded.

In principle, this decision should apply in practice to directors who are in similar situations as in the TP Case - i.e. natural persons who are members of the board of directors of a Luxembourg Société Anonyme. In this case, these directors should not be considered as taxable persons subject to VAT. This means:

• They would no longer be required to charge VAT on their director´s fees.
• The VAT incurred on costs related to their directorship services would no longer be
  deductible; and
• They would need to deregister for VAT purposes.

However, the main question remains the interpretation of the decision: does it constitute a ruling specific to the facts of the TP case, limited to natural persons serving as directors of a Société Anonyme, or does it establish a broader legal principle applicable to all directors?

3. AIQUNITED Takeaways

For the time being, the decision of the Luxembourg District Court merely confirms the CJEU’s ruling and does not provide any further details on its application in more specific cases. As such, it is premature to draw conclusions about the broader implications for the ruling beyond the specific case that has been brought before the CJEU.

One of the key steps in clarifying the VAT treatment of directors’ fees in Luxembourg should be the expected new circular to be issued shortly by the Luxembourg VAT authorities. We hope that the Luxembourg VAT authorities will take this opportunity to clarify once and for all the Luxembourg VAT treatment of directors’ fees in general (i.e. including cases where the director is a company or where the directors’ fees are invoiced by a company for the provision of a director).

In the meantime, it is recommended that directors remain registered for VAT purposes in Luxembourg and await further clarification from the Luxembourg VAT authorities on the regularisation process and on the future VAT treatment of directors’ fees.

AIQUNITED will be happy to assist you if you need any help on this matter. Please do not hesitate to contact us, for any questions you may have.