Beginning of the year 2016, it has been indicated in a press release that the Director of the Luxembourg VAT Authorities confirms that, based on the current Luxembourg VAT provisions, Director Fees should be subject to Luxembourg VAT.
Following this press release, a parliamentary question was raised to the Minister of Finance, Mr. Pierre Gramegna. In his answer dated March 9, 2016, the Minister of Finance confirmed the general principle that Director Fees should be subject to Luxembourg VAT and announced that a working group will be set up to clarify the topic and to make recommendations.
Luxembourg VAT principles
Article 4 of the Luxembourg VAT law provides that, “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 taxable person for VAT purposes”.
Based on this provision, company’s Directors providing services in consideration of which they receive Director Fees may qualify as a taxable person for Luxembourg VAT purposes. One of the consequence of qualifying as a VAT taxable person is that Luxembourg based Directors or residents in Luxembourg should have to register for VAT purposes and consequently will have to invoice Luxembourg VAT (17%).
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.
Consequently, Director Fees should be subject to Luxembourg VAT in the following situations :
- The company paying the Director Fees and the Director have established their business activities in Luxembourg – The Director may have to apply Luxembourg VAT 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.
By his answer, the Minister of Finance confirmed the intention to apply Luxembourg VAT on Director Fees, whereas the previous market practice was unclear on this topic. As regards the practical details concerning the effective application of Luxembourg VAT, a working group should be set up by the Ministry of Finance. In terms of timing, it is expected that the Luxembourg VAT Authorities would become less tolerant as from January 1st, 2017. With respect to this date, a particular point of attention would be the date of payment and the invoicing date of these Directors Fees.
It is recommended that companies and Directors, which may be impacted by these provisions, already contact their VAT advisors in order to check what could be the potential VAT impacts on their businesses.