Key takeaways

• Luxembourg-based directors should not qualify as taxable persons from a VAT perspective even though they carry out an economic activity, as long as they do not assume any personal obligations concerning their clients' debts.
• The LDC's decision does not only apply to individuals/companies rendering directorship services to public limited companies. It is up to the directors/managers to determine whether they bear the economic risk linked to their activity and if they act under their own responsibility.
• Luxembourg directors are not obliged to launch the regularization process. They must ensure beforehand whether their clients want a refund of the VAT paid.
• The statute of limitations for 2018 and 2019 has been extended until 1 July 2025 provided a regularization claim has been filed before that date.
• Luxembourg directors can opt either for the standard procedure (issuance of credit notes and new invoices) or the simplified procedure (through the dedicated platform available on MyGuichet until 30 June 2025) to recover the VAT collected and paid to the LVA.
• Luxembourg companies that self-assessed VAT under the reverse charge mechanism on director's fees paid to directors established abroad must regularize this when filing their closest annual VAT return.

In more detail

• In Circular No. 781 dated 30 September 2016, the LVA requested that Luxembourg VAT on director's fees be paid as of 1 January 2017. This circular was controversial since, before 2017, the extended market practice considered that director's fees fell outside the scope of VAT or at least benefitted from the exemption applicable to honorary activities. In a nutshell, Luxembourg VAT was generally not applied on director's fees before 2017.
• Hence, as of 2017, Luxembourg directors were obliged to apply Luxembourg VAT on their fees unless they were eligible to apply the small undertakings scheme or the assisting investment vehicles listed in Article 44, 1., d) of the Luxembourg VAT Law. For Luxembourg companies paying director's fees to foreign directors/managers, this meant that they had to self-assess Luxembourg VAT under the reverse charge mechanism (and pay it to the LVA according to their input VAT deduction right unless they benefitted from a full VAT recovery right).
• On 21 December 2023, the CJEU issued its judgment C-288/22 to determine the VAT treatment applicable to director's fees further to the LDC's preliminary ruling request. In this case, a Luxembourg individual was acting as a member of the board of directors of several public limited companies in exchange for percentage fees, and the LVA requested that VAT be paid on these fees since they considered that the individual's duties qualified as services subject to VAT.
• The CJEU interpreted that directors/managers do not carry out an activity independently (i.e., they do not bear the economic risk linked to their activity and do not act under their own responsibility) and, thus, director's fees fall outside the scope of VAT. The reasoning was sustained based on the following points: The Luxembourg director did not have a casting vote within their clients' boards, was not involved in the day-to-day management of their clients and was not a member of any management committees.
• Consequently, the LVA published Circular No. 781-1 on 22 December 2023 to suspend, with immediate effect, Circular No. 781 until the release of the LDC's decision.
• As expected, on 22 November 2024, the LDC concluded that directors that do not carry out their activity independently do not qualify as taxable persons for VAT purposes. The LDC's reasoning is in line with the CJEU's clarifications without providing further guidance (i.e., whether the decision applies to directorship services rendered to entities set up under other legal forms and whether there is a distinction between director's fees paid to individuals and those paid to companies).
• Further to the LDC's decision, the LVA issued Circular No. 781-2 dated 11 December 2024 to clarify the impact of the judgment. According to the LVA, this decision does not only apply to individuals/companies rendering directorship services to public limited companies. It is up to the directors/managers to determine whether they bear the economic risk linked to their activity and if they act under their own responsibility. In Circular No. 781-2, the following is also clarified:
  • The statute of limitations for 2018 and 2019 has been extended until 1 July 2025 provided that a regularization has been requested before that date.
  • Except for the capital expenditures, the LVA will not ask for a regularization of the VAT borne on minor expenses necessary to carry out the directorship services (no threshold has been provided; this is to be assessed on a case-by-case basis).
  • Luxembourg directors can opt either for the standard procedure (issuance of credit notes and new invoices) or the simplified procedure (through the dedicated platform available on MyGuichet until 30 June 2025) to recover the VAT collected and paid to the LVA.
  • Once refunded, the Luxembourg directors should pay back the VAT to their respective clients, and the clients have to adjust their input VAT deduction right.
  • VAT options filed by directors to apply VAT on the rent paid to their tenants will no longer be valid.
• Luxembourg directors are not obliged to launch the regularization process. They must ensure beforehand whether their clients want a refund of the VAT paid.
• Luxembourg directors opting for the simplified procedure do not need to file a VAT deregistration form with the LVA if they were registered just because of the directorship services provided. In that case, the LVA will automatically deactivate their VAT number.
• However, Luxembourg directors have to refund their clients the VAT received as of 2018, issue credit notes to their clients for all the relevant years and file any outstanding VAT returns within two months following the deregistration date.
• Luxembourg companies that self-assessed VAT under the reverse charge mechanism on director's fees paid to directors established abroad must regularize this when filing their closest annual VAT return.

How we can help

Our Tax team would be happy to assist you with any queries on recovering the Luxembourg VAT paid on director's fees and to assist with the related VAT compliance obligations further to the LDC's judgment.

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For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.