Final Word on VAT and Director Fees

Recent rulings from the Court of Justice of the European Union (CJEU) and the Luxembourg District Court have significant implications for company directors in Luxembourg. The CJEU's decision in case C-288/22 and the subsequent national judgment on 22 November 2024 confirm that directors of Luxembourg public limited companies don't perform their duties independently, so their activities aren't subject to VAT.

As a result, the Luxembourg VAT authorities have reviewed Circular 781, issued in 2016, and released Circular 781-2 on 11 December 2024. The Luxembourg VAT authorities now recognise that directors' services must be considered an economic activity if they're provided for remuneration and performed on a permanent basis with predictable compensation. But it's also acknowledged that this economic activity cannot be viewed as being carried out independently where, despite the autonomy in organising their work, directors don't bear the economic risk of their activities, which remains with the company as a consequence of the actions taken by the board of directors.

This confirms that the notions of risk and responsibility are key criteria for assessing whether an economic activity is carried out independently. The absence of hierarchy and freedom in organising their activity isn't sufficient for directors to be considered VAT taxable persons. This reasoning won't be limited to directors of public limited companies.

In light of this change in interpretation, directors should:

• Evaluate and confirm their VAT status. Those who meet the criteria for non-independence should consider applying for VAT regularisation. An online regularisation process will be available for the first half of 2025.
• Take advantage of this opportunity to correct their VAT filings for non-prescribed years. All years since 2018 are open for regularisation, including 2019, provided the regularisation is submitted by 1 July 2025.
• Inform their clients about the VAT adjustments and ensure that any overcharged VAT is refunded.
• Review their expense claims, particularly significant investments, as they might be subject to further scrutiny by the tax administration.

It's advisable to seek professional legal and tax advice to navigate the implications of these rulings and ensure compliance.