Director's fees no longer subject to VAT: what you need to know

Background

The case concerned a Luxembourg lawyer who was a member of the board of directors of several Luxembourg public limited companies and received director’s fees for his services. In assessing the VAT treatment of the director’s fees in the case at hand, the CJUE followed a two-step approach:

1. Did the director perform an “economic” activity by providing services to companies and, more specifically, are director’s fees received by such person to be regarded as remuneration paid in return for such services?
2. If yes, did the director perform this activity independently?

As to the first question, in order to be classified as “economic” for VAT purposes, the activity in question must be permanent in nature and carried out in return for remuneration. There also must be a direct link between the supply of services and the remuneration. In the case at hand, the CJEU found that a director’s activity satisfied the condition of “economic” activity within the meaning of the VAT Directive to the extent that the service is supplied on a permanent basis and in consideration of a remuneration, fixed or variable, but for which the procedure for fixing the amount is foreseeable. Although the remuneration may be fixed or variable, the court highlighted that the remuneration must remain reasonable in relation to the service supplied and present a certain degree of continuity in order for the direct link to be maintained. The findings of the court took into account that the director held a renewable six-year term in office but was revocable ad nutum.

As to the second question, the Court found that a director of a Luxembourg public limited liability company does not perform his or her activity independently, as the latter does not bear any personal economic risk associated with his or her mandate. The Court explained that it will be the company itself that will confront the negative consequences of the decisions taken by the board of directors (this being true also in cases where the director’s fees depend on the profits of the company). No personal obligation arises on the part of such directors for the commitments of the company. In fact, the CJEU found that such a director only appears to act in his or her own name when presenting advice or proposals to the board as well as while voting, as actually such director acts first for the board and, more generally, for the company. Any liability in tort or for tax debts is ancillary to the collective liability of the collegial body or of the company, as such, and can affect any person (for instance employees too). It is therefore not indicative of an independent activity.

Therefore, the CJEU ruled that a member of a board of directors, such as in the case at hand, does not carry out an independent activity.

Impact

Provided they do not carry out any other economic activity, Luxembourg resident directors whose situation is similar to the one in these proceedings will cease to qualify as VAT taxable persons (i.e., their activity will fall outside the scope of VAT), will be able to deregister for VAT purposes and will be relieved of their administrative VAT obligations. They will, however, lose their deduction right and will need to regularise the deducted input VAT to the AED.

The AED have stated they will ensure a pragmatic regularisation of the over-paid VAT subject to the statute of limitation (which should cover five years). As soon as the District Tribunal issues its decision in this case, the AED will issue a new circular which will inter alia deal with procedural aspects impacting companies, which were invoiced by the directors, and which will need to adapt their deduction right accordingly. VAT assessments issued less than three months ago may be challenged immediately.

We recommend that a case-by-case analysis be performed for each mandate, as not all situations will necessarily fail the independence criterion based on the CJEU judgment. For instance, a case where the director has a casting vote, a day-to-day management role, or is part of a management committee may not per se warrant the same conclusion.