VAT on Directors’ Fees in Luxembourg After CJEU C-288/22 Ruling

The VAT treatment of directors’ fees in Luxembourg has been a contentious issue. According to the Circular 781 issued by the Administration de l’Enregistrement, des Domaines et de la TVA (Luxembourg VAT authorities, hereinafter “AEDT” or VAT authorities”) dated 30 September 2016, director’s services (i.e. fees paid to members of a company’s board of directors) were to be treated as an economic activity and subject to Luxembourg VAT.

This status quo was challenged by a reference for a preliminary ruling lodged with the Court of Justice of the European Union (CJEU) in the case C-288/22 (TP v Administration de l’Enregistrement, des Domaines et de la TVA). The CJEU provided a long-awaited clarification in its decision of 21 December 2023, the consequences of which are analysed below.

Background of the Case C-288/22

·         Facts

TP is a lawyer and a member of boards of directors of several public limited companies in Luxembourg. His tasks include, i.a. receiving reports from senior managers, participating in strategic decision-making, selecting operational management, oversight of accounts and subsidiaries, assessing risk policy, deciding on strategy, etc.

As his remuneration TP received percentage fees (a share of company profits) awarded by the general meeting of shareholders. The Luxembourg VAT authorities issued a VAT assessment ex officio for 2019, on the basis that TP’s director activities constituted an economic activity subject to VAT.

TP objected to the assessment, arguing that as a board member a public limited company, his work is not an economic activity carried out independently under Article 9 of the VAT Directive 2006/112/EC, so he should not be considered a taxable person in that respect.

·         Main Questions from the Preliminary Ruling Request

Is a person (such as a board member of a public limited company under Luxembourg law) carrying out an economic activity under Article 9 of the VAT Directive 2006/112/EC? More specifically, are the percentage fees they receive “remuneration paid in return for services” to the company?

Is such a person carrying out that activity independently within the meaning of Articles 9 and 10 of the VAT Directive 2006/112/EC (i.e. not under an employment or similar relationship)?

·         Decision

The CJEU held that the activities of a member of the board of directors of a public limited company may constitute an economic activity for VAT purposes if the director provides services to the company in return for remuneration that is directly linked to those services, if the activity is carried out on a continuing basis, and if the method of calculating the remuneration is foreseeable.

However, such activity is regarded as being carried out independently only if the director acts on their own behalf, under their own responsibility, and bears the economic risk of their activity.

Where the company itself bears the economic risk and the director simply participates in collective decision-making without assuming personal responsibility or risk, the independence requirement is not satisfied, meaning the director is not a taxable person for VAT purposes, which CJEU established was applicable in TP’s situation. As a result, the directors’ fees he was receiving would fall outside of scope of VAT.

After the CJEU’s judgment, the TP case returned to the Luxembourg District Court, which delivered its much-anticipated decision on 22 November 2024, largely mirroring the CJEU’s reasoning. To establish whether TP should qualify as a taxable person for VAT purposes, the District Court applied the CJEU’s approach, examining both the economic character of the board member’s activity and the degree of independence with which it was carried out.

In addition, right after the CJEU ruling, the Luxembourg VAT authorities issued Circular 781-1 on 22 December 2023, suspending the application of Circular 781 (from 2016) until the District Court’s judgment. They also announced that the regularisation procedure would be outlined in a new circular following the local court’s decision.

District Court’s Ruling

The ruling of the Luxembourg District Court of 22 November 2024 did not deviate from the reasoning of the CJEU. The District Court applied the criteria provided for by the CJEU in order to establish the existence of an economic activity, namely (i) services supplied for consideration and (ii) carried out on a continuous basis for a predictable remuneration, and confirmed that TP’s board duties fulfil these criteria. Therefore, the director was carrying out an economic activity for VAT purposes.

However, the Court found that TP did not act in his own name or under his own responsibility, nor did he bear the economic risk of his activity, both essential to qualify his activities as independent. Under Luxembourg corporate law, board members do not personally assume the company’s obligations. Responsibility for directors’ decisions and their economic consequences stays with the company, except in cases of breaches of law or the articles of incorporation. The District Court emphasised that the company, not the director, bears the economic risk arising from board activities, meaning directors are not personally exposed to such risk in their role.

As a result, further to the absence of responsibility and economic risk personally born by the director, the remuneration TP received should not have been subject to VAT, and the District Court requested the tax assessments issued by the AEDT to be annulled.

Following the decision, a parliamentary question was referred to the Minister of Finance to confirm whether the ruling applies to all directors (notwithstanding the legal form of the company) and how it will be implemented in Luxembourg’s VAT law.

Circular 781-2

After the judgment of the District Court, on 11 December 2024 the VAT authorities issued Circular 781-2, confirming that the application of the reasoning of the Court should not be limited only to public limited companies. Directors must now assess on their own whether they act under their own responsibility and bear economic risk to determine VAT liability.

Those established in Luxembourg and already registered for VAT purposes, who meet the conditions put forward by the CJEU and the District Cout could request regularization of overpaid VAT invoiced and collected for non-prescribed years (including 2018 and 2019) via a simplified procedure available MyGuichet.lu during the first 6 months of the year 2025, with refunds passed on to clients. They could also opt for the standard procedure and issue credit notes and new invoices. While input VAT previously deducted on ordinary expenses will not be challenged, significant investments may require adjustments.

For non-resident directors, the Luxembourg company that paid their director fees must regularize VAT in its next annual return. Should the company have recovered the reverse charged VAT of the fees, the recovery would also have to be adjusted in the next annual VAT declaration.

Circular 781-2 also reinstates VAT for directors acting independently, requiring regularization of past periods where VAT was not charged due to the suspension of Circular 781. The implications for both directors and companies will depend on their specific circumstances, including the company’s legal form and the organization of directors’ work.

Conclusion

The combination of the CJEU’s judgment in C-288/22 and the Luxembourg District Court’s ruling of 22 November 2024 has fundamentally changed the VAT treatment of directors’ fees in Luxembourg. In most cases, directors will no longer be considered taxable persons, and their fees will fall outside the scope of VAT.

This is a welcome development for directors and companies, bringing legal certainty and reducing compliance burdens. At the same time, careful case-by-case analysis remains necessary, particularly for directors with hybrid roles or cross-border activities.