Luxembourg Tax Alert 2023-20
TP case-law: No more VAT on director’s fees
TP case-law: No more VAT on director’s fees
On December 21, 2023, the Court of Justice of the European Union (hereinafter referred to as 'CJEU' or 'the Court') published its decision in the case “TP v Administration de l’Enregistrement, des Domaines et de la TVA” (C- 288/22).
This case concerns a preliminary ruling on the VAT treatment of activities carried out by a member of a board of directors of a public limited company and whether this should be subject to VAT.
TP is a lawyer and a member of the board of directors of several public limited companies, i.e., a bank and several holding companies (listed on various stock exchanges).
As a member of those boards, he takes part in decisions concerning the accounts, risk management policy and the strategy to be followed by the group in question. He also develops proposals to be put to shareholders’ meetings.
To TP, the remuneration earned to provide such services should not be subject to VAT as he does not carry out his activity independently, but as a member of a collegiate body.
More specifically, he argued that the Luxembourg Law on commercial companies stipulates that his activities do not come with any personal obligations. According to the said law, a member of the board of directors can be personally liable only where he/she exceeds the limits of acceptable conduct (i.e., wrongful act);
The Administration de l’Enregistrement, des Domaines et de la TVA (VAT authorities) considered the director’s fees received by TP in 2019 as subject to VAT insofar that a member of the board of directors of a company carries out an economic activity independently from a permanent nature and giving rise to a remuneration according to Circular 781 issued on 30 September 2016.
An action was brought before the tribunal d’arrondissement in Luxembourg which then decided to seek a preliminary ruling from the CJEU on the question whether the remuneration of a member of a board of directors for its activity as part of a body of a legal person constitutes remuneration for an independent economic activity in accordance with article 9 of Directive 2006/112/EC on the application of value-added tax (VAT Directive).
The Court stated that the existence of an independent economic activity should be examined in the light of all the circumstances in which the activity is supplied. Indeed, the “independence” is a criterion in the same way as the performance of an “economic activity”, for qualifying as a taxable person for VAT purposes.
The Court firstly confirmed that as a member of the board of directors of a Luxembourg public limited company, TP should exercise an “economic activity” as long as he supplies services to that company for consideration and provided that his activity is effected on a continuous basis and for a remuneration for which the procedures for fixing that amount are foreseeable.
Secondly, to determine the independent nature of such an activity, the Court assessed whether TP was free to arrange how he performs his work and himself receives the emoluments which make up his income, was acting in his own name, was subject to a hierarchical subordination, was acting on his own behalf or under his own responsibility and was bearing the economic risk linked to his activity.
The decisive factors were (1) whether TP was bearing the economic risk of his activity, and (2) whether he was acting in his own name, on his own account and under his own responsibility. Both have been denied by the Court due to various reasons: lack of personal assumption of personal obligations concerning the debts of the company as well as lack of economic initiative as TP is bound by rights and obligations which are conferred to the collegiate body, he is part of by commercial law.
Therefore, as the above conditions related to the independence are not met, TP as a member of a board of directors of a public limited company does not qualify as a “taxable person” under article 9 of the VAT Directive. Consequently, the director’s fees received by TP for its activities should not be subject to VAT (i.e., falling outside the scope of VAT).
Based on our practice, such circumstances are common for a large number of directors of public limited companies who should be relieved from the application of VAT on their fees. However, there could be instances where managers in charge of daily operations of companies would have - by law - a personal liability for some debts of the company (such as tax debts) and might be acting with a higher level of independence. A case-by-case analysis is therefore always advisable.
This decision might thus constitute an important change in the VAT treatment of the services of members of a board of directors. It should be noted that the decision should now be confirmed by the Luxembourg Tribunal d’arrondissement based on the guidelines provided by the Court. However, the VAT authorities already reacted by suspending with immediate effect the existing circular (circular 781 dated 30 September 2016) until the decision of the Tribunal d’arrondissement. This circular foresees a very broad application of VAT to directors’ fees. The VAT authorities also commented on their website that they will ensure a pragmatic regularization of any over-paid VAT, which is anticipated to be performed through the online platform MyGuichet provided this VAT is not subject to the statute of limitation period. With respect to the latter and following a communication dated 15th January 2024, the authorities have exceptionally waived the statute of limitations (in principle of 5-year) for the fiscal year 2018.
Therefore, based on the arguments brought by the Court and suspension of the circular by the authorities, we could expect that fees received by a member of a board of directors should no longer be subject to VAT, provided that the director bears no economic risks in connection with its activities and does not act on an independent basis. This would mainly benefit companies with no or a limited input VAT recovery right, for which VAT constitutes a final cost. Consequently, Luxembourg members of boards of directors could be relieved from the obligations to be registered for VAT and file VAT returns, but should VAT deregister.
A number of questions remain unanswered, such as the scope of the decision (limited to the case of members of a board of directors or with a broader application), as the VAT authorities leave it up to the individuals to determine whether or not they fall within the scope of the TP case-law.
Your team of VAT experts stay at your disposal for any questions you may have in respect with the above.