Luxembourg Tax Alert 2024-13

As expected, the VAT authorities were prompt to issue a circular clarifying the broader implications of the District Court’s ruling that occurred on 22^nd November 2024, which only confirmed the non-applicability of VAT to the directors’ fees received by “TP” from the Luxembourg public limited companies for which he was acting as a board member (see our previous alert 2024-10). This decision followed an earlier ruling from the Court of Justice of the European Union, on 21^st December 2023.

As a reminder, the Court of Justice of the European Union (hereafter CJEU or the Court) ruled in the case “TP v Administration de l’Enregistrement, des Domaines et de la TVA” (C-288/22) further to a preliminary ruling request emanating from the Luxembourg District Court.

In this decision, the CJEU ruled that TP, a member of the board of directors of public limited companies, may not be conducting its economic activity on an independent manner and, as a result, may not qualify as a “taxable person” under article 9 of the VAT Directive (see our previous alert 2023-20). Consequently, the directors’ fees he was receiving would not fall within the scope of VAT.

Following the CJEU’s decision, the TP case was referred back to the Luxembourg District Court, which issued a highly anticipated ruling on 22^nd November 2024, closely reflecting the CJEU ruling. In order to confirm whether “TP” should be considered as a taxable person or not for VAT purposes, the District Court followed the CJEU reasoning and focused on the economic nature of the activity performed by the member of a board, as well as the "independent" character of that activity. 

Firstly, the District Court considered the two criteria used by the CJEU to characterize the existence of an economic activity, consisting of (1) the supply of services to the companies for consideration and (2) activities that are performed on a continuous basis and for a foreseeable remuneration. The District Court considered that the services supplied by TP as a member of the board of directors of public limited companies should constitute an economic activity for VAT purposes.

Secondly, with respect to the independent exercise of such activity, the District Court acknowledged for a start that TP, as a board member of Luxembourg public limited companies organizes the execution of his work independently, receives his own remuneration, and is not subject to hierarchical subordination; these elements constituting positive evidence to determine the “independent” nature of that activity.

However, the following two elements, both essential to characterize the independence of the economic activity carried out, were not present in case at hand. Firstly, TP was not acting in his own name, on his own account and under his own responsibility. Secondly, he was not bearing the economic risk of his activity. Indeed, this risk is borne by the company, as a consequence of the actions of the board of directors.

Consequently, TP, as a board member of a Luxembourg public limited company who does not act under his own responsibility nor bear the economic risk of his activity should not be considered as performing this economic activity on an independent manner. This implies that the directors’ fees he was receiving should not be subject to VAT. The District Court consequently requested a cancellation of the tax assessments issued by the Luxembourg VAT authorities against TP.

In principle, this ruling should apply to any board member of a Luxembourg public limited company in the same situation as TP, i.e. not acting under his or her own responsibility nor bearing the economic risk of his or her activity.

As a result of this decision, a number of uncertainties however remained, which gave rise to a parliamentary question concerning notably the scope and impact of the District Court ruling on directors of other forms of companies, as well as related to the general application of VAT in this context.

In order to clarify the broader implications of this ruling, the VAT authorities reacted on 11^th December 2024 with the circular 781-2, addressing the practical consequences of the CJUE’s and District Court’s judgements. The VAT authorities first confirmed it did  not intend to limit the consequences of these rulings only to board members of Luxembourg public limited company.

Based on this circular, it is up to the directors to assess whether they meet the criteria set by these decisions, namely whether they act on their own responsibility and bear the economic risk related to their activity, to determine if they should (still) be subject to VAT. This assessment must be carried out with the utmost care, as it could potentially entail the following actions and consequences:

• Irrespective of whether they are natural persons or exercising their activities through a company (i.e. legal persons), the directors established in Luxembourg who are already VAT-registered and fulfill the conditions prescribed by both judgements, i.e., not carrying out their activity from an independent manner, can benefit from a regularization of VAT they invoiced and collected for non-prescribed years, including 2018 (for which the VAT authorities choose not to invoke the statute of limitations) and 2019, provided the request is made before 1^st July 2025.
• In this respect, a pragmatic regularization of any over-paid VAT is already available through the online platform MyGuichet.lu. This application will be accessible during the first sixth months of 2025. This procedure allows directors to submit their requests for all relevant years through a single process.
• The regularized VAT must be refunded directly by the concerned directors to their respective clients, who will, if necessary, adjust the relevant amount of VAT recovered for the relevant years with respect to the director’s fees paid.
• With respect to the input VAT recovery right applied by directors where their activities are no longer subject to VAT, the authorities will not challenge the input VAT recovery right previously acquired on VAT in connection with ordinary expenses necessary for their functions. However, where more significant investments were incurred (e.g., real estate; vehicles; IT equipment), a regularization of the initially deducted tax could be required.
• With respect to directors fulfilling the aforementioned conditions but not established in Luxembourg, their client (Luxembourg company) will be responsible for the regularization as the latter was the one liable to collect the VAT on such services, according to the general B2B localization rule. The regularization of this VAT will thus be the responsibility of the company receiving the services, which will perform a single correction for all the years concerned in the next annual VAT return (i.e., either 2023 annual VAT return – if not yet submitted, or 2024 annual VAT return).

To close the loop, this circular cancels the suspension of the circular 781 of 30^th September 2016 from the date of issue of this last circular 781-2 (i.e., 11^th December 2024), for directors subject to VAT. Hence, for directors exercising their activities in an independent manner, the application of VAT is now reinstated and the past periods for which no VAT was charged due to the suspension should now be regularized. The VAT authorities will however take into account the fact that the application of was suspended for nearly a year.

The numerous implications for both directors (i.e. notably the assessment of their situation, performance of regularizations if relevant, screening of significant investments if any) and companies receiving the services from external directors, will now need to be assessed depending on the specific facts and circumstances of each situation. There is no doubt that the legal form of the company paying the directors fees and organization of the directors’ assistance will play a significant role in this assessment.

Your team of VAT experts remains at your disposal for any questions you may have regarding the above.