Luxembourg: Director’s fees not subject to VAT (CJEU judgment)

The Court of Justice of the European Union (CJEU) on 21 December 2023 issued a judgment that activities carried out by a member of a board of directors of a public limited company were not subject to value added tax (VAT).

The case identifying information is: TP v. Administration de l’Enregistrement, des Domaines et de la TVA (C-288/22)

The taxpayer was a lawyer and member of the board of directors of several public limited companies (i.e., a bank and several holding companies listed on various stock exchanges). The taxpayer argued that the director’s fees he received for his activities as a member of those boards did not constitute remuneration for an independent economic activity in accordance with article 9 of Directive 2006/112/EC on the application of the VAT Directive because he did not carry out such activities independently, but as a member of a collegiate body.

The court concluded that the existence of an independent economic activity must be determined based on all the circumstances in which the activity is supplied, such as whether the taxpayer was free to arrange how he performed his work and whether he 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. Based on the fact that the taxpayer did not bear the economic risk of his activity and did not act in his own name, on his own account, and under his own responsibility, the court found that the taxpayer’s activities were not taxable under article 9 of the VAT Directive.

A large number of directors of public limited companies likely will be relieved from the application of VAT on their fees based on this decision. However, there could be instances in which managers in charge of daily operations of companies would have 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.

The decision must 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.

A number of questions remain unanswered, such as the potential retroactive application of the decision as well as its scope (limited to the case of members of a board of directors or with a broader application).

Read a December 2023 report prepared by the KPMG member firm in Luxembourg