On 21 December 2023, the Court of Justice of the European Union (CJEU) rendered a decision (case C‑288/22 TP vs. Administration de l'enregistrement, des domaines et de la TVA) implying that directors' fees should not be subject to Value Added Tax (VAT).
This breakthrough decision overrides the established position of the Luxembourg VAT authorities and notably the Circular N°781, issued on 30 September 2016, which stated that directors' fees were indeed subject to VAT as board members are carrying out an independent economic activity. It may also have implications elsewhere in the EU.
Background
This case initially started on 28 July 2020 when TP, a member of the board of directors of several Luxembourg limited liability companies, received an ex officio VAT tax assessment for the financial year 2019 from the Luxembourg VAT authorities, assessing that VAT was applicable on their director activities.
In a letter on 2 October 2020, TP lodged a claim with that tax authority against the tax assessment, arguing that the activity of a member of the board of directors of a Luxembourg limited liability company does not amount to an economic activity for VAT purposes and does not confer the status of a taxable person on such a member. By a decision of 23 December 2020, the claim was rejected in accordance with the position of the VAT authorities reflected in the Circular N°781. It was concluded that a member of a company's board of directors carried out an independent economic activity in consideration for the payment for the services provided.
There are two requirements (in broad terms). There has to be an economic activity and it has to be independent.
On 26 January 2021, the case was brought before the Luxembourg District Court (tribunal d'arrondissement de Luxembourg), which referred the case to the CJEU for a preliminary ruling. The following questions were asked to the CJEU:
- Is a natural person who is a member of the board of directors of a limited company incorporated under Luxembourg law carrying out an "economic" activity and, more specifically, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?
- Is a natural person who is a member of the board of directors of a limited company incorporated under Luxembourg law carrying out his or her activity "independently"?
Key aspects from the CJEU's decision
On the first question, regarding whether a member of the board of directors of a limited company should be considered as carrying out an economic activity, the Court stated that "a member of the board of directors of a limited company under Luxembourg law carries out an economic activity, within the meaning of that provision, where he or she supplies services to that company for consideration, provided that that activity is effected on a continuing basis and for a remuneration for which the procedures for fixing that amount are foreseeable". Hence, in the present case, the CJEU considered that indeed, (i) a director is carrying out an economic activity and (ii) the percentage fees can be regarded as remuneration paid in return for services provided.
On the second question, regarding whether the activity of a member of the board of directors of a limited company under Luxembourg law is carried out independently, the Court stated that "the activity of a member of the board of directors of a limited company under Luxembourg law is not carried out independently, within the meaning of that provision, where – despite the fact that that member is free to arrange how he or she performs their work, receives the emoluments making up his or her income, acts in his or her own name and is not subject to an employer-employee relationship – he or she does not act on their own behalf or under their own responsibility and does not bear the economic risk linked to their activity". Therefore, the Court followed the opinion delivered on 13 July 2023 by Advocate General Kokott by concluding that directors do not assume risk personally in a way that prevents the independency criteria being met.
What's next?
The decision of the CJEU could imply that members of the board of directors of Luxembourg companies may not be considered as taxable persons for VAT purposes and therefore directors' fees should not be subject to VAT. It will now be up to the local court to apply their decision to the specific facts since the CJEU recommends that the local court takes into account the domestic company law on the allocation of responsibilities between the directors and the companies.
While the applicability of this decision depends on a case-by-case analysis, it is worth mentioning that the VAT authorities published a new Circular, Circular N°781-1, on 22 December 2023 to suspend the previous Circular N°781 with immediate effect. At the time of the release of Circular N°781-1, the Luxembourg VAT authorities mentioned that, as soon as the judgment is issued at national level, they will regularise the VAT position of the directors and handle the subsequent VAT reimbursement swiftly, taking into account the five-year limitation period. Finally, from a European Union perspective, in light of the diverging interpretations in the different EU Member States, other national VAT authorities may have to adapt their position to comply with the decision of the CJEU which is directly and immediately applicable. Again, the precise position will depend on the interaction of the local company law and the VAT rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.