Director Fees: ECJ ruling promises a reform of the Luxembourg VAT rules
Director Fees: ECJ ruling promises a reform of the Luxembourg VAT rules
The long-awaited decision of the European Court of Justice (“ECJ”) on the VAT treatment of director fees (C-288/22, TP case) has been issued and promises a significant change in the Luxembourg VAT landscape!
Since 1 January 2017, directorship services, with very specific exceptions, have been subject to Luxembourg VAT at the standard VAT rate of 17% (either locally or under the reverse charge mechanism for recipient companies that qualify as VAT taxable persons). As a result, Luxembourg directors have also borne certain Luxembourg VAT compliance obligations (i.e. VAT registration, compliant invoices, VAT returns).
Following a rather economic approach, the ECJ ruled that the key criterion to confirm if directors act independently and, thus, whether their fees should be subject to VAT is whether they assume personal responsibility and economic risks. Although such interpretation may raise some practical questions that should be assessed on a case-by-case basis, in most cases in Luxembourg directors should not be regarded as independent and their fees should not be subject to VAT.
The Luxembourg VAT authorities (“AEDT") already published the Circular No 781-1 of 22 December 2023, which suspends with immediate effect the application of the Luxembourg VAT rules on director fees (i.e. the Circular n°781 of 30 September 2016) until the Luxembourg referring court (i.e. “Tribunal d’arrondissement”) issues its decision on the merits of this case.
Since 1 January 2017, directorship services, with very specific exceptions, have been subject to Luxembourg VAT at the standard VAT rate of 17% (either locally or under the reverse charge mechanism for recipient companies that qualify as VAT taxable persons). As a result, Luxembourg directors have also borne certain Luxembourg VAT compliance obligations (i.e. VAT registration, compliant invoices, VAT returns).
Following a rather economic approach, the ECJ ruled that the key criterion to confirm if directors act independently and, thus, whether their fees should be subject to VAT is whether they assume personal responsibility and economic risks. Although such interpretation may raise some practical questions that should be assessed on a case-by-case basis, in most cases in Luxembourg directors should not be regarded as independent and their fees should not be subject to VAT.
The Luxembourg VAT authorities (“AEDT") already published the Circular No 781-1 of 22 December 2023, which suspends with immediate effect the application of the Luxembourg VAT rules on director fees (i.e. the Circular n°781 of 30 September 2016) until the Luxembourg referring court (i.e. “Tribunal d’arrondissement”) issues its decision on the merits of this case.