The VAT Regime of Directors’ Fees Following the Issuance of a New VAT Circular
by Thibaut Boulangé, Director, Indirect Tax, Atoz
“The Circular confirms that directors’ services do constitute an economic activity and indicates the director’s status as a VAT taxable person, irrespective of whether this activity is exercised by an individual or by a company”
On 30 September 2016, the Luxembourg VAT authorities released the long-awaited Circular on the VAT treatment applicable to directors’ fees. The Circular determines that directors’ services constitute an economic activity and indicates the director’s status as a VAT taxable person, irrespective of whether this activity is exercised by an individual or by a company. Directors’ services are therefore subject to Luxembourg VAT when invoiced by a Luxembourg established director to a Luxembourg company.
In recent months, the future Luxembourg VAT treatment applicable to directors’ fees has been subject to debate and to comments in numerous press articles. Until now, no specific guidance had been published by the Luxembourg Indirect Tax authorities (“Administration de l’Enregistrement et des Domaines”) on the VAT treatment applicable to these fees; the practice was quite variable and unpredictable.
The debate on whether directors’ fees are subject to VAT, benefit from a VAT exemption or do not fall within the scope of VAT has been on-going for several years in various EU Member States. In this respect and under threat of an infringement proceeding from the European Commission, the Netherlands amended its VAT practice in 2011 to ensure that directors are treated as VAT taxable persons regardless of the number of mandates held. However, major differences to the VAT treatment of directors’ fees amongst EU Members States continue to exist. In this context, the Luxembourg VAT authorities released the long-awaited Circular n°781 on the VAT treatment applicable to directors’ fees and published on their website a list of “Frequently Asked Questions” on 30 September. This Circular provides an overview of the Luxembourg VAT treatment applicable to directors’ fees.
Simply put, the Circular confirms that directors’ services do constitute an economic activity and indicates the director’s status as a VAT taxable person, irrespective of whether this activity is exercised by an individual or by a company.
VAT treatment of Luxembourg Independent Directors
One of the main confirmations provided by the Circular is that director mandates exercised independently by a Luxembourg individual or by a Luxembourg company constitute an economic activity falling within the scope of the VAT. Luxembourg directors at the board of a company are consequently considered as VAT taxable persons (“assujetti”).
- Practical consequences at the level of the Luxembourg directors
Directors established in Luxembourg will be required to register for VAT purposes as from 1 January 2017. The Circular confirms that the strict observance of these rules is required as from 1 January 2017 as well.
As a general rule, directors’ services will therefore be subject to Luxembourg VAT at a rate of 17% when invoiced by a Luxembourg director to a Luxembourg company. It should be noted that withholding tax applied on fees invoiced by the director is part of the taxable basis subject to VAT.
If we consider that the gross remuneration of the director’s mandate amounts to EUR 100,000.00, the withholding tax would amount to EUR 20,000.00 (20% of the gross amount) and the Luxembourg VAT would amount to EUR 20,400.00 (EUR 120,000.00 x 17 %).
Directors will have to issue VAT compliant invoices and submit VAT returns. The filing periodicity will be based on the annual turnover of the director (periodical and/or annual VAT returns). Directors will be liable to pay the VAT charged on the services rendered to the Luxembourg Treasury, after deduction of the amount of input VAT borne within the framework of their activity.
- Exceptions: small enterprise scheme and “honorary” directors
Provided, in particular, that the annual turnover of a director does not exceed a threshold of EUR 30,000.00 (as from 1 January 2017), the Circular specifies that the small enterprise scheme would be applicable to that director. In such a case, no VAT would be applicable on the services rendered by the directors but, as a consequence, no VAT deduction right would be recognised. A VAT registration is nevertheless required in such a case.
Furthermore, “honorary” director services would benefit from a specific VAT exemption already in force in the current Luxembourg VAT Law. According to the Circular, “honorary” directors are those which only receive an indemnity considered as a defrayal. No additional details are provided by the Circular in order to determine the scope of the notion of “defrayal”.
- Exception: VAT exemption for the management of investment funds
Surprisingly, no guidelines are given by the Circular on the application of the VAT exemption foreseen for the management of investment funds (Article 44, § 1, d. of the Luxembourg VAT Law). There are, however, significant arguments to consider that director services rendered by board members of regulated funds should be covered by this VAT exemption and therefore should not be subject to VAT.
Nevertheless, uncertainty remains regarding the application of the VAT exemption to directors’ services rendered to the management company of a fund qualifying for the VAT exemption or to an Alternative Investment Fund Manager. It could be argued that part of the directors’ services rendered to these management companies is related to the management of the underlying qualifying fund and should therefore benefit from the VAT exemption. A case-by-case approach would be recommended in order to determine the adequate VAT treatment in these circumstances.
VAT treatment of Luxembourg Dependent Directors – Employees
The Circular also reaffirms that directors acting within the framework of an employment contract are not independent and are therefore not considered as VAT taxable persons.
An employee sitting on the board of a company on behalf of his or her employer is not acting independently and should not be considered as a VAT taxable person. In such a case, the employer will be considered as supplying the directors’ services and the VAT obligations will arise at the employer level.
VAT treatment of Foreign Independent Directors
When the director is established outside of Luxembourg, a distinction has to be made based on the VAT status of the Luxembourg company receiving the directors’ services.
If the Luxembourg company is a VAT taxable person, VAT will be declared under the reverse charge mechanism (B2B VAT rule). Luxembourg companies performing only VAT exempt activities (e.g. EU financing activities) could potentially be required to register for VAT purposes if they receive directors’ services from non-Luxembourg directors.
To the extent the Luxembourg company is not a VAT taxable person (e.g. passive holding company), the place of taxation is deemed to be located where the director has established his business (i.e. outside Luxembourg – B2C VAT rule). Depending on the VAT treatment applicable to directors’ fees in the country of establishment of the director, invoices with foreign VAT or without any VAT could be received by the Luxembourg company. Indeed, the VAT treatment applicable to directors’ fees differs from one Member State to another.