The CJEU has held that directors’ fees are not subject to VAT, the temporary VAT rate reductions end on 31 December 2023 and a bill of law extends the scope of the reverse charge from 1 January 2024.
On 13 July 2023, CJEU Advocate General Kokott opined that the activities of independent directors are not subject to VAT since they cannot be viewed as carrying out an independent economic activity for VAT purposes. AG Kokott further emphasised that subjecting directors’ fees to VAT would inevitably lead to a distortion of competition between companies required to act through a board of directors and other entities.
On 21 December 2023, the CJEU held that, even though the activity of an independent director would qualify as an economic activity for VAT purposes, it is not carried out independently if the director does not act on its own behalf or under its own responsibility and does not bear the economic risk associated with its activity (TP v AEDT (Case C-288/22)).
On 22 December 2023, the Luxembourg VAT authorities released Circular No. 781-1 suspending the effects of Circular No. 781 that recognised the activities of independent directors as being subject to VAT, until the Tribunal d'Arrondissement issues its ruling in the TP case in the light of the CJEU's decision.
When they released Circular No. 781-1, the Luxembourg VAT authorities also confirmed that, once the judgment is handed down at national level, they will ensure that directors are able to regularise their VAT position within the 5 year limitation period in a smooth manner. A detailed circular will be issued at that point, which will also address the situation of companies that need to adapt their VAT deduction right to the new legal position.
End of temporary reduction of VAT rates
In 2022, the surge in inflation significantly affecting consumer purchasing power led to a set of measures, including a temporary 1% reduction in most VAT rates in Luxembourg. This reduction, effective from 1 January 2023, ends on 31 December 2023. Luxembourg’s VAT rates will thus revert to 17% (standard rate), 14% (intermediate rate) and 8% (reduced rate) on 1 January 2024.
Businesses that modified their accounting systems to accommodate the temporary reduction need to comprehensively revise their internal processes once again, to ensure the correct implementation of the reinstated VAT rates. This includes accounting procedures and software, invoice templates, contracts and agreements.
Bill of law of 3 November 2023 – extension of VAT reverse charge mechanism
To combat VAT fraud, particularly so-called “carousel fraud”, a bill of law has been introduced which will extend the reverse charge regime to certain categories of goods that typically form the basis of these fraudulent transactions. As from 1 January 2024, the bill of law proposes to extend the reverse charge mechanism to the supply of mobile phones, tablets, laptops, gaming consoles, integrated circuits and raw or semi-finished metals.
To differentiate between the sale of goods intended for ultimate consumption and those made for purely business purposes, the reverse charge mechanism will only come into effect when the transaction concerned exceeds the threshold of EUR 10,000.