Luxembourg VAT treatment of director's fees

Background

The case before the CJEU concerned a director of several Luxembourg limited liability companies, who had received an ex officio VAT tax assessment for the financial year 2019, assessing that VAT was applicable on their director activities. The CJEU was asked the following questions:

• Is a natural person who is a member of the board of directors of a 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?  
• Is a natural person who is a member of the board of directors of a limited company incorporated under Luxembourg law carrying out his or her activity "independently"?

CJEU decision

On the first question, the CJEU confirmed that the activities of the member of the board directors would constitute economic activities where the member supplies services to that company for a consideration. There must also be a certain degree of continuity and the remuneration (whether fixed or variable), must remain reasonable in relation to the services supplied. 

On the second question, the CJEU found that the member of the board of directors does not perform his or her activity independently, as the latter does not bear any personal economic risk associated with his or her mandate, in other words, no personal obligation arises on the part of directors for their commitments to the company, despite the fact that directors are entitled to arrange how he or she perform their duties and are not subject to an employer and employee relationship. 

Therefore, although there is a degree of continuity and the remuneration associated with their roles, the CJEU found that board directors do not fulfil the independence criterion required for VAT liability so that their services are not subject to VAT.

What's new?

The decision of the CJEU could imply that members of the board of directors of Luxembourg companies may not be considered as taxable persons for VAT purposes and therefore directors' fees should not be subject to VAT. While the applicability of this decision depends on a case-by-case analysis, it is worth mentioning that Circular N°781 has now been repealed.