After years of legal uncertainty and debate, the Luxembourg VAT authorities have brought long-awaited clarity to the VAT treatment of directors’ fees. With the publication of a new circular at the end of 2024, the authorities have now formalised their stance, aligning with recent court rulings and setting out a framework for regularisation and compliance. Cyril Poels at Norton Rose Fulbright outlines the background to the case, the key takeaways from the new circular, and what directors—resident and non-resident—need to know going forward.
On 11 December 2024, the Luxembourg VAT authorities issued Circular No. 781-2, marking what seems to be the final step in resolving the Luxembourg VAT debate on directors’ fees. This circular provides guidance on the VAT authorities› official stance and establishes a framework for regularisation and compliance moving forward.
Recap of the VAT saga
Historically, the Luxembourg VAT authorities considered independent directors as VAT taxable persons, making their fees (tantièmes) subject to VAT, except in specific cases.
A CJEU decision on 21 December 2023 (case C-288/22 TP vs. Administration de l’enregistrement, des domaines et de la TVA), however, reshaped this position and opened the door to the VAT position of directors of Luxembourg companies being interpreted differently. The question addressed by the CJEU in this case was whether board members of a Luxembourg company carry out an economic activity and whether that activity is conducted independently (the requirements for directors to qualify as VAT taxable persons).
In a nutshell, the CJEU concluded that while the directors did carry out an economic activity, they did not assume personal economic risk and for that reason did not satisfy the independence criterion. As a result, their fees for these services should not be subject to VAT.
Nearly a year later, on 22 November 2024, the Luxembourg District Court (Tribunal d’arrondissement) ruled on the same issue for the first time since the CJEU›s decision. The District Court followed the CJEU’s reasoning, concluding that directors of Luxembourg public limited companies do not perform their activities independently for VAT purposes. They do not act on their own behalf nor bear economic risk, meaning their fees should fall outside the scope of VAT.
This decision, whilst helpful for Luxembourg directors, was limited to its specific facts and left a number of areas open to interpretation in particular the extent of the possible application of the decision to directors of entities with different legal form.
New circular: final clarifications?
To provide clarity on the implications of the CJEU and District Court decisions, the Luxembourg VAT authorities issued Circular No. 781-2 on 11 December 2024. This circular provides final guidance from the VAT authorities and sets a framework for ongoing compliance and regularisation, including the question of repayment.
In the circular, the VAT authorities clarify that the VAT treatment established in the CJEU and District Court decisions for public limited company (SA) directors may also be extended to directors of private limited liability companies (SARLs) and other legal forms, provided they meet the criteria for exclusion from the scope of VAT, based on a self-assessment.
Additionally, the VAT authorities clarify that directors who are currently registered for VAT, whether individuals or legal entities, can request retroactive VAT adjustments if they meet the criteria.
For non-resident directors, the responsibility for correcting VAT incorrectly applied under the reverse charge mechanism lies with the client companies. These companies must adjust accordingly their next annual VAT return, thereby relieving non-resident directors of the responsibility for the regularisation process.
Years covered by the VAT regularisation process
Directors seeking refunds for overpaid VAT can benefit from Luxembourg’s five-year statute of limitations. In addition, the VAT authorities have chosen not to invoke the statute of limitations in respect of claims for 2018. Claims for 2019 must be submitted before 1 July 2025. A dedicated online tool is now available via MyGuichet.lu.
Before starting the process to obtain a VAT refund however, it is important to assess carefully whether directors meet the conditions outlined in the CJEU and District Court decisions. VAT treatment of directors’ fees remains case-specific, meaning a detailed case-by-case assessment is still required.
Cyril Poels is Avocat à la Cour in Luxembourg and a senior associate at Norton Rose Fulbright. The law firm is a member of the panel of experts for Investment Officer Luxembourg.