The story goes back to the Circular n°781 issued by the Luxembourg VAT authorities on September 30, 2016. At that time, the VAT authorities confirmed that directors were supplying a service against a consideration and therefore performed an economic activity that fell into the scope of VAT. As taxable persons, Directors established in Luxembourg, whether individuals or working as companies, became liable to register for and charge VAT on their services as from January 1, 2017.
The publication of this Circular brought some light on a topic that remained a large grey area for practitioners. For a long time, Directors fees were not subject to VAT under the interpretation that:
- Directors’ fees depended on the amount of the benefits and were fixed in accordance with the articles of association and following the approval of the shareholder’s meeting. Since the remuneration had to be a subjective value, i.e. a price that the parties are free to determine, this condition was not fulfilled since the Directors’ fees were decided by the shareholder’s meeting;
- the absence of a direct and immediate link between the accomplishment of the director’s mandate and the fees paid was also an argument not to regard these as the remuneration of a transaction falling within the scope of VAT;
- the directors were not acting independently but collectively as an organ of the company within the framework of its mandate agreement concluded with the company.
The very same arguments are now being put forward again in the case at hand. TP, a board member of a number of public limited companies in Luxembourg, was ex-officio subjected to VAT on the percentage fee he received by the VAT authorities. TP challenged the VAT assessment before the Luxembourg District Court who in return asked the Court the following questions:
- whether a natural person who is a member of the board of Directors of a public limited company carries out an economic activity;
- in particular, if his percentage fee is to be regarded as the consideration received in return and lastly;
- whether a natural person acting as a member of a board of directors carried out his activity independently.
While the statute of limitation for the pre Circular era is coming to an end in December 2022, the consequences of an overturn of the stance taken by the VAT authorities may be a real nightmare to handle in practice, as the current position is based only on a Circular with no binding value. In terms of compliance burden for the directors and potential costs savings for the significant number of recipients without input VAT deduction right, the impact of such ruling is undoubtedly worthwhile.
While it may take a few more years before the Court issues its judgment, this latest development may finally draw the line on an important topic for our local market.