Luxembourg VAT on directors’ fees: latest developments

Recap of the ruling

Historically, the Luxembourg VAT authorities have taken the position that independent directors qualify as VAT taxable persons, making their remuneration subject to VAT, except in certain specific cases.

The CJEU’s ruling addressed the following points:

• The interpretation of whether a member of the board of directors of a Luxembourg company carries out an “economic activity”; and
• The determination of whether such activity is conducted "independently".

In essence, the CJEU concluded that a director carries out an economic activity, however, directors who do not assume personal risk in a way that satisfies the independence criterion cannot be regarded as taxable persons for VAT purposes. Consequently, directors’ fees in such cases should not be subject to VAT. For more background on the CJEU decision, please refer to our previous newsletter.

Following the CJEU ruling, the Luxembourg VAT authorities swiftly revisited their historical stance with the issuance of circular No. 781-1 on 22 December 2023. This circular immediately suspended the application of the previous circular No. 781 of 20 September 2016, which covered VAT on directors’ fees. The suspension was intended to remain in place until the District Court issued a decision on this issue, after which the VAT authorities were expected to provide further guidance. The VAT authorities also announced that a procedure would be implemented to allow the retroactive regularisation of undue VAT paid on directors’ fees.

Key takeaways of the District Court decision

Less than one year after the CJEU ruling, the District Court followed the CJEU’s position. It stated that a member of the board of directors of a public limited company under Luxembourg law carries out an economic activity for VAT purposes, however, such activity is not carried out independently if the director does not act on their own behalf, does not operate under their own responsibility, and does not bear the economic risk related to their activity. As the criterion of independence was not met in the relevant case, the District Court ruled that the activity of the director in question did not fall within the scope of VAT and subsequently cancelled the tax notices which had been issued.

Although this decision closely followed the CJEU’s ruling, there was still some room for interpretation. Certain issues, such as the possible application of this decision to directors of companies with a different legal form, as well as the available repayment options, which were not addressed by the CJEU, also remained unclear after the District Court’s decision, as its scope of analysis was limited to the specific circumstances of the case at hand. As a result, uncertainty remained as to whether the same VAT treatment would apply in other situations.

Therefore, while the decision was clearly a positive development for Luxembourg directors, it did not establish a universal precedent. A case-by-case assessment would still be required to determine the VAT implications for each director’s situation.

New circular issued by the VAT authorities – end of the saga?

Finally, to provide further guidance following the CJEU ruling and the District Court decision (the Decisions), the Luxembourg VAT authorities issued the Circular in December 2024. In it, they indicated that not only can directors of public limited companies (sociétés anonymes) benefit from the Decisions, so can directors of companies operating under other legal forms, such as e.g., private limited liability companies (sociétés à responsabilité limitée), in each case provided the director(s) meet the criteria to be excluded from VAT scope, based on a self-assessment.

Further, the Circular specifies that all directors currently registered for VAT, whether natural or legal persons, who meet the criteria established by the Decisions confirming that they do not carry out an economic activity independently in their capacity as company directors, may benefit from a regularisation of the VAT paid.

It is worth noting however that for directors residing abroad or without domicile or habitual residence in Luxembourg, the responsibility for correcting VAT mistakenly applied to their fees under the reverse charge mechanism should fall on the relevant client companies. As a result, such directors would generally not be required to undergo regularisation. The relevant client companies will be responsible for regularisation in their next annual VAT return for all years concerned.

For those directors seeking reimbursement of overpaid VAT the good news is that, even though the statute of limitations for VAT issues in Luxembourg is five years starting on 1st January of the year following the tax period, for 2018 and 2019 the VAT authorities have chosen not to invoke it. This allows claims to be made for these periods provided that, for 2019 claims, the request is submitted before 1 July 2025. Regularisation can also be carried out for all years not subject to the statute of limitations. A dedicated regularisation tool has been made available online and is accessible via MyGuichet.lu.

However, before a director can start the regularisation process to get a VAT reimbursement, it is still necessary to carefully assess whether the conditions outlined in the Decisions have been met, as VAT treatment still depends on individual circumstances and requires a case-by-case analysis.