BDO Indirect Tax News

European Union: Luxembourg - CJEU clarifies board members not subject to VAT

In a decision published on 21 December 2023, the Court of Justice of the European Union (CJEU) concluded that the activities of members of a board of directors of a Luxembourg public limited company are not subject to VAT (for prior coverage, see the article in the October 2022 issue of Indirect Tax News).

The case before the CJEU involved an individual who was on the board of directors of several public limited companies incorporated under Luxembourg law and who carried out activities in conjunction with this position. For example, the board member received reports of senior managers or representatives of the companies, discussed strategic proposals, the choice of operational managers, and took part in the decision-making regarding the companies’ accounts and proposals to be submitted to shareholder meetings. The individual was renumerated in the form of “percentage fees,” i.e., a percentage of the companies’ profits, as approved by the general meeting of the shareholders. The Luxembourg tax authorities took the position that company directors independently carry out economic activities and so are subject to VAT. The Luxembourg court referred the case to the CJEU to determine:
  • Whether a member of the board of directors carries out an economic activity under the EU VAT Directive when they provide services to the company for remuneration; and
  • Whether a board member’s activity is considered independent for VAT purposes.
The CJEU concluded that a member of the board does engage in economic activity if their services are provided on a permanent basis and for foreseeable remuneration. However, with respect to independence, the CJEU determined that independence depends on factors such as whether the individual acts on their own behalf, under their own responsibility and bears the economic risks associated with their activity. In this case, the CJEU concluded that a board member who does not act independently, despite having certain freedoms in their role, is not considered independent for VAT purposes.

In summary, members of the board of directors providing services to a company can be considered to be engaged in economic activity for VAT purposes but their independence depends on various factors as outlined above. In most cases in Luxembourg, directors are thus not to be seen as independent. Those who registered for VAT, charged VAT on their fees and submitted VAT returns to the tax authorities over the last few years should revisit their positions, as should companies that incurred the VAT on the fees. It should be noted that on 22 December 2023, the Luxembourg VAT authorities released a circular that, effective immediately, suspends the application of the Luxembourg VAT rules on director fees until the Luxembourg referring court issues its decision on the merits of the case.

Erwan Loquet
Dimitrios Karoutis
BDO in Luxembourg