On 21 December 2023, the Court of Justice of the European Union (“ CJEU ” or “ Court ”) issued a decision on the case C-288/22. The Court puts an end to a long debate by ruling that the members of the board of directors of a Luxembourg company do not carry out an independent VAT economic activity. The Court considered that they do not undertake their activity independently given that they do not act on their own behalf, their own responsibility and they do not bear the risks linked to their activity. Hence, directors’ fees should no longer be subject to VAT provided they meet the conditions detailed by the Court in its decision.
Background and description of case submitted to the CJUE
On 30 September 2016, the Luxembourg VAT authorities (“ AEDT ”) issued the Circular n° 781 clarifying that the activity carried out by a member of the board of directors of a Luxembourg company entailed a supply of services within the meaning of the Luxembourg VAT law. Therefore, in application to this Circular, which came into force as from 1 January 2017, directors’ fees invoiced to Luxembourg resident companies were subject to Luxembourg VAT (subject to a VAT exemption being applicable, e.g., the management of certain investment funds).
In a case related to the application of the Luxembourg VAT law to directors” fees in Luxembourg, a preliminary ruling procedure was submitted to the CJEU. In this Luxembourg case, the taxpayer was acting 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. The AEDT challenged the VAT treatment applied to these fees and issued an ex-officio assessment.
The Director brought an annulment action against the decision before the Luxembourg District Court and argued that the directors’ fees received for his activity as board member did not constitute a remuneration for an independent economic activity since he was acting as a member of a collegial body and his fees were awarded by resolution of the shareholders’ general meeting.
The Luxembourg District Court referred the case to the CJEU in August 2022, which had to determine whether the director’s activity falls within the scope of the Council Directive 2006/112/EC of 28 November 2006, as amended (“ VAT Directive ”). To that end, the CJEU had to assess whether a member of the board of director of a Luxembourg company carries out an economic activity and if so, whether such activity is carried out independently.
Decision of the CJUE
According to the Court, a member of the board of directors of a Luxembourg company carries out a VAT economic activity in accordance with Article 9 of the VAT Directive, where he or she supplies services to that company for consideration and there is a direct link (i.e. reciprocal performance) between both. This also requires that the activity is carried out on a continuing basis (i.e., with certain permanence) and for a remuneration for which the determination methods are foreseeable and allows effective payment to the supplier.
Secondly, the Court established that the activity of a member of the board of directors of a Luxembourg company was not carried out independently since he or she 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. This is confirmed by Luxembourg company law under which board members generally do not assume company’s liabilities in the context of their mandate.
The Court followed the reasoning of Advocate General Kokott and considered that it is the company itself that will have to confront the negative consequences of the decisions adopted by the board of directors and that will accordingly bear the economic risk (i.e. profits and losses) resulting from the activity of the members of the board. This is consistent with the fact that the remuneration is not linked to his own activities but for those of a collective body (i.e. the board) and indicates that the board members do not act under their own responsibility.
Impact of the Decision
According to the decision of the CJEU, director fees should, under certain conditions, no longer be subject to VAT in Luxembourg.
This decision brings important consequences for non-independent Luxembourg directors. Indeed, the latter will cease to be liable to charge Luxembourg VAT on their director’s services, will have to de-register from VAT (provided they do not carry out any other VAT economic activity requiring a VAT registration in Luxembourg) and will lose their related VAT input deduction right.
This decision also impacts the companies paying director fees since they will no longer pay Luxembourg VAT on director’s fees to Luxembourg-based directors and non-Luxembourg based directors through the reverse charge mechanism. Such VAT paid constituted until now a final cost for companies with no or a reduced input VAT deduction right.
In this context, the AEDT published on 22 December 2023 the Circular N° 781-1, which suspends Circular N° 781 of 30 September 2016 with immediate effect. In addition, the AEDT released a statement on 15 January 2024 confirming that directors concerned by the CJEU decision will have to issue corrective invoices and justify to the AEDT any refund claim over VAT unduly invoiced. The AEDT also specified that a special regularization process ( régularisation non-bureaucratique) will be available for the reimbursement of VAT unduly charged via the myGuichet website. Finally, it is worth noting that the AEDT clearly indicated that this refund procedure would be available with respect to tax year 2018 and going forward within the VAT statute of limitation.
This decision of the CJUE is a significant change in the Luxembourg VAT practice but a case-by-case analysis is recommended in order to determine whether the directors’ fees fall outside the scope of VAT (i.e., whether the director receiving such director fees carries out his/her director’s activity independently).
