On 22 November 2024, the Luxembourg District Court ruled that directors’ fees are not subject to VAT, applying the CJEU’s decision of 21 December 2023 (C-288/22).
In its judgment, the District Court (Tribunal d’arrondissement) followed the reasoning of the CJEU by analysing the conditions for a taxable person to fall within the scope of VAT. These are classification of the director’s activity (i) as an economic activity (Article 9 of the VAT Directive), and (ii) as an independent activity (Articles 9 and 10 of the VAT Directive).
In this context, similarly to the CJEU, the District Court ruled that:
- Services provided by members of the board of directors of a Luxembourg public limited company (société anonyme) constitute an economic activity for VAT purposes.
- However, the activity of a member of the board of directors of a public limited company under Luxembourg law is not carried out independently, due to the lack of personal liability and economic risk borne by that member.
As the characteristic of independence is missing, the District Court concluded that such activity does not fall within the scope of VAT and cancelled the taxation notices issued to the director in the case at hand.
This decision follows the CJEU’s judgment closely but still leaves room for discussion. Certain aspects not addressed by the CJEU are similarly not addressed by the Luxembourg District Court, which focused on the particular case in question and excluded other specific cases from its review. Thus, questions remain open on whether the same approach would be applicable in the following situations:
- Would the director’s fees be impacted if the company does not achieve a profit or achieves only a small amount of profit?
- What if the director has a casting vote on the board of the public limited company?
- What if the director is responsible for the day-to-day management of the company?
Although this decision is welcome for Luxembourg directors, it cannot be guaranteed that this outcome will be extended to every specific situation. A case-by-case review may be necessary to assess the VAT treatment of each director. As mentioned in Circular 781-1 issued on 22 December 2023, the VAT authorities should issue further guidance shortly which hopefully will provide greater clarity in this respect.
