By Thierry Charon, Partner at Loyens & Loeff
The rumour has been going around for months, and it is now starting to materialise. After years of grey area in the sector, the Luxembourg VAT Authorities and the Minister of Finance confirmed that Director Fees should be subject to Luxembourg VAT.
This position is not new, however in past market practice, a comparison between Director Fees and dividends was notably used to argue that Director Fees should fall outside the scope of VAT.
Nevertheless, based on the VAT principles applicable, “any person who independently carries out, on a regular basis, in any place any economic activity, whatever the purposes or results of that activity, qualifies as a taxable person for VAT purposes”1,2. Based on this provision, company Directors who independently provide services in consideration of which they receive Director Fees may qualify as a taxable persons for Luxembourg VAT purposes. Considering the broad definition of a taxable person for VAT purposes, any independent Director, whether a private or legal person, may fall under this definition.
Additionally, it becomes clear that where the place of supplies of services performed by Directors is deemed to be located in Luxembourg, those services should be subject to Luxembourg VAT. As a consequence, Directors based or residing in Luxembourg may have to register for VAT purposes in Luxembourg and to invoice Luxembourg VAT.
As a reminder, based on the general rule for the place of taxation of services falling within the scope of VAT3,4, and the provisions regarding the person liable for paying VAT5,6, VAT applicable on Director Fees should, in principle, be as follows:
- A Director, having established their business activities in Luxembourg, provides services to a Luxembourg-based company: the Director may have to register for Luxembourg VAT and may have to apply Luxembourg VAT on their invoices. Nevertheless, a Director whose annual turnover falling within the scope of VAT does not exceed EUR 25.000, may opt for not being registered for Luxembourg VAT.
- A Director, having established their business activities outside Luxembourg, provides services to a Luxembourg-based company qualifying as a VAT-taxable person: the company should self-assess Luxembourg VAT on those services, even if the Luxembourg-based company only supplies exempt activities (e.g. financing activities). It should be noted that even if the Director is not required to be VAT registered in their country of establishment, Luxembourg VAT should, in our view, be self-assessed by the Luxembourg-based company. This could lead to potential mismatches between the VAT returns to be filed by the Luxembourg-based company and European Sales Listings for services which would not report such supplies of services.
- A Director, having established their business activities outside Luxembourg, provides services to 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 their business. Consequently, in case the Director has established their business within the European Union, the country of establishment or residency of the Director is competent to tax.
It may be noted that the point of view on the VAT taxation of Director Fees differs from Member State to Member State. Some Member States consider, as will be the case in Luxembourg, that Director Fees are subject to VAT irrespective of whether the Director acts as a private person or company. Others make such a distinction, whereby Directors acting as private individuals would remain outside the scope of VAT.
Although the announcement was made to submit Director Fees to VAT, many uncertainties remain. In his answer dated 9 March 2016 to a parliamentary question on this topic, the Minister of Finance announced that a specific working group would be set up. Even if the results obtained by this working group are unclear, the marketplace is expecting more practical details on this topic. In terms of timing, it is expected that the Luxembourg VAT Authorities will become less tolerant as from 1 January 2017. With respect to this date, a particular point of attention will be the date on which the Director Fees will be paid and/or invoiced.
In conclusion, even if the practical details are not yet specified, it is recommended that companies and Directors, which may be impacted by these provisions, do not delay an analysis of what the potential VAT impact on their businesses could be.
1 Article 4 and 5 of the Luxembourg VAT law dated 12 February 1979, as modified.
2 Article 9 of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as modified.
3 Article 17 of the Luxembourg VAT law dated 12 February 1979, as modified.
4 Article 44 of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as modified.
5 Article 61 of the Luxembourg VAT law dated 12 February 1979, as modified.
6 Article 193 and following of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as modified.
You can read the other articles from Ipes' Private Equity update (edition 21) at the following links: