On 22 November 2024, the Luxembourg District Court (the "District Court") issued the long-awaited decision clarifying the VAT treatment of directors' fees following the judgement of the Court of Justice of the European Union (the "CJEU") dated 21 December 2023 (Case C-288/2). For further details on the CJEU decision, please refer to our previous newsflash. This decision of the District Court was followed by a swift reaction from the Luxembourg VAT authorities which issued Circular N° 781-2 on 11 December 2024, enshrining the practical implementation of this case law.
Background
This court case in question involved a taxpayer who acted as a director of several Luxembourg public limited companies (the "Director") in consideration for a percentage fee based on the profits realized by these entities. The Director did not apply any VAT on his remuneration and the Luxembourg VAT authorities challenged the VAT treatment applicable to these fees. The Director brought an annulment action against the decision before the Luxembourg District Court which referred the case to the CJEU in order to determine whether the Director's activity fell within Luxembourg VAT scope.
The CJEU ruled that the activity of a board member qualifies as an "economic activity" under Article 9 of the Council Directive 2006/112/EC of 28 November 2006, as amended (" VAT Directive ") if the activity is carried out (i) for consideration, (ii) on a continuous basis and (iii) for a remuneration for which the determination method is foreseeable. However, the CJEU considered that the said activity was not carried out independently when the board member does not act on his/her own behalf or under his/her own responsibility and does not bear the economic risk linked to his/her activity.
Decision of the Luxembourg District Court
As expected, the Luxembourg District Court followed the CJEU decision and used the same arguments to rule in favor of the Director. The court considered that the Director was carrying out an economic activity for VAT purposes, but such activity was not carried out independently. Therefore, the Director should not be considered as taxable person for VAT purposes.
Following the decision, the Luxembourg VAT authorities released their new Circular N° 781-2 which complements and supersedes the previous Circular 781-1. This new Circular acknowledges the decisions of the CJEU and the Luxembourg District Court and gives welcome practical information.
Practical implications from Circular 781-2
- Each board member remains liable to assess whether he/she/it should qualify as a VAT taxable person considering these recent decisions (issued by the CJEU and the District Court). The consequences of the decisions will be applicable to all type of directors and not only to those who act for public limited liability companies.
- Board members (individuals or companies) who/which meet the criteria of the CJEU and the Luxembourg District Court may benefit from the standard regularization procedure. The regularization covers non-prescribed years but also the years 2018 and 2019 for which the VAT authorities have waived the statute of limitation.
- A streamlined process ("procédure non bureaucratique") which allows board members to submit their requests for all relevant years in a single application is also available on MyGuichet.lu until 30 June 2025.
- VAT authorities will not challenge the board members' VAT deduction right who/which do not qualify as VAT taxable person provided that it relates to "normal" expenses. However, for significant amount expenses (such as investment expenses), an analysis of the situation will be carried out by the VAT authorities with a risk of challenge of the VAT initially deducted.
- Circular n°781 dated 30 September 2016 which was suspended by Circular n° 781-1 dated 22 December 2023 takes effect again as from 11 December 2024 for board members who/which qualify as a VAT taxable person.
Action points for companies and board members
- Assess whether for the years concerned the board members qualify as a VAT taxable persons in accordance with the criteria developed by the CJEU and the Luxembourg District Court.
- Should this not be the case, board members should contemplate starting a regularization procedure (standard or streamline procedure) and review the amount of input VAT deducted in the past.
- For board members who/which do not qualify as VAT taxable persons in accordance with the criteria of the CJEU and the Luxembourg District Court, a de-registration for VAT purposes should be filed (subject to any other VAT economic activity being undertaken).
- Board members established abroad or not having their domicile or habitual residence in Luxembourg are in principle not required to regularize, the reason for this being that the companies for which the foreign board members exercised their functions were liable to declare and pay the VAT due on services supplied by these foreign board members (under the so called, reverse charge mechanism). In the latter situation the obligation to regularize lies with the companies which received such board members' services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
