New Circular No 45/2 – 152/1 – 168/1 on the Withholding Tax of Director Fees


On 14 February 2017 the Luxembourg direct tax authorities (Administration des contributions directes“ACD”) issued on a new circular no 45/2 – 152/1 – 168/1 addressing the withholding tax on director fees and interractions with value added tax (“VAT”) (the “Circular”). The Circular reminds that director fees (tantièmes) are considered as a remuneration of an independent worker1), which are to be differentiated from the salaries and similar remunerations paid to directors for their day-to-day management of a company. Such director fees are subject to a withholding tax (“WHT”) of 20% of the gross amount when they are paid by a Luxembourg tax resident company on behalf of the director2).

As a recollection, the tax treatment of director fees has already been detailed and precised by the ACD in the circular no 94/4 issued on 24 June 2008. They are specifically to be distinguished from attendance fees, which nature and tax treatment is covered by the circular no 91/1 of the ACD issued on 26 September 2003.


1. VAT liability of directors

Further to an annoucement early 2016, the Luxembourg indirect tax authorities (Administration de l’enregistrement et des domaines – “AED”) issued on 30 September 2016 the circular no 781 (“Circular 781”) clarifying that Luxembourg VAT (currently at the rate of 17%) applies on director fees provided that the director’s activity qualifies as an economic activity performed in an independent way3) unless a VAT exemption applies4). In this respect, Circular 781 is silent on application of the VAT exemption for management services provided to investment funds ruled by article 44, 1 d) of the Luxembourg VAT law. Such exemption should be available to the extent that services rendered by the director is essential and specific to the management of the fund in accordance with the EU case-law, and is to be ascertained on a case-by-case basis.

As a result of Circular 781 directors – whether Luxembourg resident or not – might have to register for Luxembourg VAT purposes5).

This position is in our view fully compliant with the provisions of the Luxembourg VAT law and the position of the European Commission, which has always considered directors as VAT persons.

2. Determination of the WHT amount: exclusion of VAT on director fees

WHT on director fees is to be computed on the gross amount of the director fees (before deduction of any costs of the director, including business expenses, special expenses, taxes and duties) exclusive of any VAT incurred.

3. Determination of the Luxembourg taxable base of the director

  • Luxembourg resident directors perceiving director fees exceeding EUR 1,500 per year must file an annual income tax return and thus become taxed on an assessment basis6).
  • Luxembourg non-resident directors must file an annual income tax return only when (i) their director fees exceed EUR 100,000 in the fiscal year or (ii) they perceive other Luxembourg source income during the same fiscal year7). Otherwise, WHT on the director fees should be a final discharge to the Luxembourg non-resident director from a Luxembourg direct tax perspective8).

Director fees are treated as business income to be added to the directors’ other revenue and taxed at a progressive rate of up to 44.94% (including the solidarity surcharge). WHT levied by the paying company should nevertheless be credited against the director’s personal income tax.

For directors falling within the scope of the simplified accounting method9) (revenue-expenditures), the Circular recalls10) that any VAT collected on director fees is to be included in the taxable base as a business income11), conversely VAT paid to the AED is a tax deductible expense.

4. VAT deductibility at the level of the paying company

From a direct tax point of view, director fees are not tax-deductible expenses at the level of the paying company.

The Circular specifies essentially that also the VAT on director fees is not tax-deductible for direct tax purposes when it is non-deductible as input tax for VAT purposes. As a result, VAT on Director fees will be a final cost for companies that are not VAT person or have no VAT deduction rights.

If the VAT on director fees is partially deductible for VAT purposes (e.g. in case the company uses the pro rata method), only the non-deductible part is to be considered as non-tax deductible for direct tax purposes.


The Circular is effective immediately, but to the extent that it only consolidates a previous interpretation of the income tax law it is to be considered simply as a confirmation of current practice.

From a VAT point of view, it is worth mentioning that while the AED was not in practice accurately checking whether VAT was in fact applied or not on director fees prior to the issuance of Circular 781 (and certain practitioners were of the view that VAT was not to be applied – inconsistent with the EU commission’s position) VAT on director fees should be carefully applied.

Ultimately, through the issuance of both the Circular and Circular 781, attention has been given to both the direct and indirect tax treatment of director fees in the past couple of months12), which is a strong indicator that both the ACD and the AED will proceed with more scrutinous assessments of director fees from now on.

1.    It is underlined that the tax qualification of director fees as remuneration of an independent worker does not necessarily coincide with the qualification from an employment law or social security standpoint since the criteria used for such qualifications are not the same in each domain.
2.    If the withholding tax is borne by the company, the rate is increased to 25%.
3.    In practice, this is to be determined on a case-by case basis (e.g. based on the contract between the parties fixing the remuneration or not).
4.    Article 44, paragraph 1, letter d) of the Luxembourg VAT law, for instance, provides for a VAT exemption for the management of certain funds. However, it would appear that the simple attendance of the board of a fund should not be analysed as a “corporate” function to the fund (and thus not be seen as a service specific to the activity of the fund) and should therefore not benefit from the aforementioned VAT exemption.
5.    Directors established in Luxembourg may have to register for VAT purposes in Luxembourg if their annual turnover exceeds EUR 30,000.
6.    Below the EUR 1,500 amount, the director may nevertheless elect to file a tax return and be taxed on an assessment basis.
7.    If the filing of a tax return is not mandatory, the Luxembourg non-resident director may nevertheless elect to file such a tax return under certain conditions (in order to benefit, in certain cases, of a lower average tax rate than the withholding tax rate).
8.    The taxation in the country of residence of the director would need to be assessed on a case-by-case basis, but as far as treaty countries are concerned director fees should, in line with the OECD Model Convention, be taxed in the source country (i.e. Luxembourg for Luxembourg resident companies paying director fees) and typically exempted in the country of residence, although subject to the progressive clause.
9.    The taxpayer may opt for this method under certain specific conditions set out by the grand-ducal decree of 3 December 1969, as modified.
10.    Although this tax treatment had already been specified by the service note no 1010 issued by the ACD on 27 September 1983.
11.    And any VAT paid to the AED is to be considered as a tax-deductible expense. It is to be highlighted that, in respect to director fees, the director may opt for a deduction of actual costs (e.g. travel costs) or for a lump-sum deduction, the latter being however only available when a Luxembourg annual tax return is filed.
12.    In particular, the VAT treatment of director fees had given rise to a lot of media attention and public debate (e.g. a parliamentary question had been presented to the Minister of Finance on this specific matter on 10 February 2016).