New administrative guidelines on the VAT treatment of director's fees

On 11 December 2024, the Luxembourg indirect tax authorities (Administration de l'enregistrement, des domaines et de la TVA – the "AED") issued new guidelines with respect to the VAT treatment of director's fees (AED circular n°781-2 of 11 December 2024 -  the "New Circular").

Executive summary

The remuneration of directors or managers of Luxembourg companies for their directorship or managerial mandates should in principle not be subject to VAT in Luxembourg to the extent that such director or manager does not act independently (case-by-case analysis). 

Luxembourg based directors or managers that have previously charged VAT on their remuneration or companies that paid the VAT under the reverse charge mechanism may request the regularisation of such VAT.

Background

On 30 September 2016, the Luxembourg indirect tax authorities (Administration de l'enregistrement, des domaines et de la TVA) issued a circular (AED circular n° 781 of 30 September 2016– the "Circular") within which it was generally confirmed that independent director mandates that are exercised by a natural or legal person fall within the scope of VAT. Such relevant directors had to undergo certain VAT compliance obligations (e.g. VAT registration, issuance of compliant invoices, filing of VAT returns). 

On 22 November 2024, the Luxembourg District Court (Tribunal d’arrondissement) ruled that the remuneration paid by a public limited company (société anonyme) to a natural person as a compensation for its directorship services should not be subject to VAT in Luxembourg (the "TP Case"). The outcome of this case follows the preliminary judgment delivered by the Court of Justice of the European Union (“CJEU”) on 21 December 2023 (C-288/22 TP vs. Administration de l'enregistrement, des domaines et de la TVA) with respect to the same case. 

In the TP Case, an individual who served as a board member for several Luxembourg limited liability companies challenged the general principle provided within the Circular and considered that no VAT should apply to the remuneration received from its directorship mandates.

On 26 January 2021, the case was brought before the District Court, which referred the case to the CJEU for a preliminary ruling. On 21 December 2023, the CJEU ruled that 

1. a natural person acting as a director of a Luxembourg public limited company carries out an economic activity for VAT purposes to the extent that (i) such person is supplying a service in exchange for a consideration, (ii) the activity of that person is of a permanent nature, and (iii) the remuneration paid in consideration for the services is determined based on a procedure that is foreseeable; and
2. such director does however not act independently for VAT purposes if such person (i) does not act on his own behalf or (ii) under their own liability and (iii) does not bear the economic risk of its activity, despite the fact that such person (a) is free to arrange their work, (b) receives himself the emoluments for his work, (c) acts in his name and (d) is not subject to an employer-employee relationship.

The same considerations were taken over by the District Court in the TP Case. 

The New Circular

The New Circular fully endorses the TP Case and the criteria put forward therein. As a consequence, any director that based on those criteria is not considered as acting independently for VAT purposes should not be considered as being a VAT taxable person and hence the remuneration received for any directorship mandates should not be subject to VAT in such case. A case-by-case assessment would need to be performed by each director to determine whether he or she acts independently or not in light of those criteria. 

The New Circular clarifies that the scope of application of the TP Case should not be limited to directors of Luxembourg public limited companies. Consequently, the same assessments should apply with respect to the managers of a limited liability company (société a réponsabilité limitée) or a partnership limited by shares (société en commandite par actions). Moreover, the same assessment applies also whether the director or manager is a natural person or a company.

Based on the New Circular, any director or manager that is VAT registered, whether a natural person or company, may benefit from a regularisation of the VAT invoiced. The regularisation can only be requested for years that are not subject to the statue of limitation, except for fiscal year 2018 for which the AED is willing to waive the statue of limitation and for fiscal year 2019 for which the AED is also willing to waive the statue of limitation if the regularisation request is filed before 1 July 2025.

VAT regularisation procedure

For the regularisation procedure, a distinction is made between: 

• VAT was due by the director / manager: 
  • A non-bureaucratic procedure is accessible via MyGuichet.lu during the first six months of 2025 for the regularisation of the VAT;
  • the directors / managers would have to pay the regularised VAT to their respective costumers and the latter would have to regularise their deduction rights accordingly;
  • the VAT deduction right of a director / manager would not be challenged for minor expenses linked to their functions but regularisation is expected for substantial expenses which qualify as investment expense.

• VAT was not due by the director / manager (i.e. VAT was due by the company under the reverse charge):
  • the company that has paid the VAT under the reverse charge mechanism would need to request the regularisation of the VAT in one go in their annual tax return.

It should be noted that the Old Circular that has been suspended continues to apply for the directors or managers that would be considered as not acting independently. 

Please feel free to reach out to your usual Ashurst contact or the Ashurst Luxembourg tax team in case you would need any assistance on the above.