Content of the circular
The Luxembourg VAT Authorities published, on 30 September 2016, a long-awaited clarification regarding the Luxembourg VAT treatment of director fees. Earlier this year, the Director of the Luxembourg VAT Authorities had indicated, although informally, that there was no reason for Director fees to fall outside the scope of VAT.
The clarification, brought in the form of a Circular, provides that the activities of company director qualify as an economic activity falling within the scope of VAT. As a result, company directors are to be considered as taxable person for Luxembourg VAT purposes, their supply of services hence being subject to Luxembourg VAT should they be deemed to be located in the Grand Duchy.
The Circular specifies that employees, acting as Directors on behalf of their employers, do not qualify as taxable persons, considering the absence of the necessary independence. However, the employers would in such cases be considered as taxable persons.
The small enterprises regime remains fully available to taxable persons falling within the conditions laid out in Article 57 of the Luxembourg VAT law. Likewise, company directors providing honorary services – i.e. services the compensation of which takes the form of a simple defrayal – can benefit from the VAT exemption provided in Article 44, §1, w) of the VAT law.
The Luxembourg VAT Authorities call for the strict adherence with these principles as from 1 January 2017 onwards.
- The company paying the Director Fees and the Director have established their business activities in Luxembourg : The Director should apply Luxembourg VAT (17%) on its invoices;
- The company paying the Director Fees qualifies as a VAT taxable person and the Director has established its business activities outside Luxembourg : The company should self-assess Luxembourg VAT on those services. This is also the case if the Luxembourg based company only supplies exempt activities (e.g. financing activities);
- Where the Director Fees are paid by a Luxembourg based company not qualifying as a VAT taxable person (e.g. passive holding companies), the place of taxation should be deemed to be located at the place where the Director has established his business. Consequently, in case the Director has established his business within the European Union, the country of establishment or residency of the Director is competent to tax. One should analyze Member State per Member State how the country of residency is treating Director Fees. The view on that point differs from Member State to Member State.