Until very recently, the Administration de l’Enregistrement et des Domaines (“Luxembourg VAT Administration”) had not publicly taken a position on the VAT treatment of services supplied by company Board members and members of management committees.
The Luxembourg VAT Administration’s position was seldom addressed in individual decisions and these decisions only concerned the VAT treatment of “directors”, i.e. in the context of the Luxembourg Law on commercial companies, the Board members of public limited companies (“sociétés anonymes”). According to these decisions, directors, acting in their capacity as private individuals or legal persons within the framework of a social mandate - as opposed to an employment contract - had to be considered as taxable persons. All types of directors’ fees were considered as subject to VAT, including the percentage fees calculated as a share of company profits.
However, the Luxembourg VAT Administration never officially communicated this position. In practice, therefore, company directors’ activities were generally considered to be outside the scope of VAT and remuneration paid to directors was not subject to VAT.
To clarify this situation and ‘bridge the gap’ between the unofficial position of the VAT Administration and the common practice, a parliamentary question was submitted to Finance Minister Pierre Gramegna on 10 February 2016. In his answer, Mr Gramegna indicated that a working group would be set up to clarify these issues and an official position would be made public as soon as possible.
On 30 September 2016, the Luxembourg VAT Administration published a much-awaited circular-letter on the VAT treatment of company directors (circular-letter 781).
This circular-letter has now finally confirmed that company directors acting independently have the status of taxable persons. As such, from 1 January 2017, they must comply with all Luxembourg VAT legislation obligations. Meanwhile, an employee exercising the functions of a company director, when representing his or her employer, will not be acting independently and should therefore not be considered as a VAT payer.
Taxation of services supplied by company directors
Directors’ fees will be subject to Luxembourg VAT at 17% provided that the services supplied take place in Luxembourg under Article 17 of the Luxembourg VAT law. However, in the following situation, directors’ services that take place in Luxembourg will not be subject to Luxembourg VAT:
- If the company director falls under the franchise regime applying to small businesses (that have a yearly turnover not exceeding EUR 25,000);
- If the company director benefits from the “honorary activities” exemption. The Luxembourg VAT Administration considers a director’s activity to be “honorary” if the indemnity (attendance fee) is paid as a contribution towards the expenses of the director. In practice, it is assumed the attendance fee should be very limited;
- If the services qualify as the management services of an investment fund, i.e. provided that the services in question can be characterised as the management services of a qualifying investment fund (within the meaning of Article 44.1.d of the Luxembourg VAT law).
The VAT obligations of company directors
Company directors will have the following obligations:
- VAT registration: company directors established in Luxembourg should be effectively registered with the VAT Administration from 1 January 2017.
- Invoicing: as VAT payers, company directors must make sure that invoices are issued for the services they supply to (i) any other VAT payer or (ii) any legal person that is not a VAT payer.
- Filing VAT returns: company directors should file periodic VAT returns. The period, whether monthly, quarterly, or yearly will depend on the amount of the company’s annual turnover.
- Payment of Luxembourg VAT due
- Company directors established in Luxembourg are liable to pay VAT on services supplied to Luxembourg-based companies. If these services are supplied by directors not established in Luxembourg, then the VAT on directors’ fees must be self-reported by the Luxembourg-based company through the ‘reverse charge’ mechanism.
- The current Luxembourg VAT rate that, in principle, applies to services supplied by company directors is 17%.
- The amount on which the Luxembourg VAT will be calculated comprises of all the remuneration paid for the services supplied by company directors, i.e. everything that constitutes remuneration obtained or to be obtained by company directors from customers or third parties. Though the circular-letter is not specific on this point, it can be inferred that percentage fees as paid to company directors are considered part of the taxable amount.
The taxable amount includes all taxes, duties, levies and charges, excluding the VAT itself. Withholding taxes on directors’ fees are therefore part of the taxable amount for VAT purposes.
Directors’ fees paid by Luxembourg-based companies might be subject to VAT even if the director is a private individual established in a jurisdiction where he/she is not considered as a taxable person for his/her mandate as director. For example, this would be the case if a private individual established in Belgium received directors’ fees from a Luxembourg-based taxable person.
Apart from the possible VAT ‘leakage’ that such a situation could create, the VAT regime confirmed in the circular-letter 781 might also have indirect consequences for the VAT status of companies paying directors’ fees. For example, where a Luxembourg-based company that is paying directors’ fees only has an exempt turnover (and, therefore, is not registered for VAT purposes), it may need to register for VAT purposes solely for the purpose of self-assessing the Luxembourg VAT due on the directors’ fees paid to a foreign director.
Any delay in complying with VAT obligations may trigger penalties from 1 January 2017. We, therefore, recommend that company directors carefully review their VAT situation and VAT registration as soon as possible.
Although the new VAT status of company directors will involve some ‘red tape’, this development might have some advantages. As taxable persons, company directors will have the right to deduct ‘upstream’ VAT. An important condition for taking this benefit is to keep evidence of ‘input’ VAT charged on directors’ expenses. The question can also be raised about whether company directors can claim for a partial recovery of past VAT incurred on the purchase of investment assets.
Finally, the cross-border VAT impact of this Luxembourg development must be checked in detail. For example, Belgium-established directors, who are natural persons, remain outside the scope of VAT in Belgium while their services in Luxembourg will be VAT-taxable. This difference will trigger specific compliance issues.
Tiberghien can help company directors assess their respective situations in light of this recent and important development.
For more information, please contact:
Jean-Luc DASCOTTE - Partner (email@example.com)
Valérie BIDOUL - Senior Associate (firstname.lastname@example.org)
Stijn VASTMANS - Partner (email@example.com)