The Luxembourg VAT Authorities recently confirmed to the Luxembourg Association of Company Directors that independent director’s fees are subject to VAT at the standard rate of 17%. Although this statement was viewed by many as a new administrative practice, the Head of the Luxembourg VAT Authorities insisted that his position did not change and that he always considered company directors as VAT taxable persons carrying out economic activities in an independent and usual manner.
This position seems to be in line with the view taken by the European Commission, which had initiated an action for infringement against the Netherlands in 2011. At that time, the Dutch VAT rules did not consider company directors as VAT taxable persons unless they carried out an important number of corporate mandates. Under pressure from the European Commission, the Netherlands finally changed their law one year later, so that the issue was never brought to the European Court of Justice.
In practice, Luxembourg directors should thus register for VAT purposes, charge VAT to their client companies and file VAT returns according to the Luxembourg VAT law unless the de minimis rule applies. This rule provides that any VAT taxable person whose annual turnover, including but not limited to director’s fees, amounts to less than EUR 25,000 does not have to register and charge VAT, provided that it does not carry out any cross-border activities.
Companies that either do not qualify as VAT taxable persons or that have only limited input VAT deduction rights, might as a result suffer irrecoverable VAT costs.
From an income tax perspective, director’s fees are subject to a 20% withholding tax, computed on the gross amount, exclusive of VAT, allocated to the director.
It should finally be noted that, according to several press reports, the Head of the Luxembourg VAT Authorities seems to have announced that his administration would adopt a lenient approach for the past tax years. Furthermore, the Minister of Finance suggested in a response to a parliamentary question that further guidance may be provided soon. Directors should nevertheless carefully consider their VAT situation as soon as possible.