Final episode on VAT and directors’ fees: Luxembourg VAT authorities issue Circular 781-2
Following the Luxembourg District Court's judgment of 22 November 2024 and the CJEU's decision of 21 December 2023 (C-288/22), the Luxembourg VAT authorities issued Circular 781-2 on 11 December 2024, providing final guidelines on the VAT treatment of directors.
As a reminder, the Luxembourg District Court and the CJEU held that directors of public limited companies (sociétés anonymes) should not be considered as acting independently, due to the lack of personal liability and economic risk borne by such directors. Therefore, their activities should fall outside the scope of VAT. However, these decisions still left room for discussion as they were given on the particular facts of the case at hand and questions remained open as to whether the decisions could be extended to other situations. For further information, see our previous newsflashes.
Circular 781-2 is therefore welcome as it provides further guidance on a more general view of the directors’ VAT regime and puts an end to these longstanding discussions. The main points can be summarised as follows:
1. Scope of Circular
- The rulings on the VAT status of directors will not be limited to directors of public limited companies (sociétés anonymes) and therefore will be extended to directors/managers of other legal forms of company (e.g. Sàrl and SCA).
- Similarly, the rulings will be applied to directors who are natural or legal persons. It must be noted that, following a discussion with ILA (Association of Luxembourg Directors), this also includes directors acting through their own companies (i.e. being shareholders). However, although not explicitly addressed in the Circular, it seems that the benefit of this VAT regime should not be extended to companies making employees available as directors since the Circular refers to directors who personally receive the remuneration for these directorship services. Therefore, Circular 781 remains applicable to the latter case, i.e. application of VAT at the rate of 17% on the directors’ fees.
- In any event, every director should assess whether, in their particular case, they meet the conditions laid down in the above-mentioned decisions.
2. Regularisation process
- As previously announced, the VAT authorities have set up a dedicated tool for non-bureaucratic regularisation of the VAT applied by directors in the past. This tool is now available on MyGuichet.lu as from 16 December 2024.
- The VAT authorities have waived the statute of limitation for 2018 and 2019, provided that the requests are made by 1 July 2025.
- Depending on whether or not the director is established in Luxembourg, the regularisation process will differ as follows:
Directors established in Luxembourg:
- They will be able to use the ad hoc procedure on MyGuichet.lu and transfer the VAT refunded to their clients. However, this regularisation is not mandatory for directors and they should check whether their clients wish to obtain a VAT refund before launching the regularisation process.
- The VAT authorities will not challenge the VAT deduction right of directors for routine expenses linked to their directorship activities. However, large expenses such as capital expenditure will be subject to the adjustment period (5 or 10 years).
- Particular attention should be paid to any VAT option exercised on the lease of a building as characterisation of directors as non-taxable persons will automatically cause the VAT option to fall away.
Directors established abroad:
- It is up to the companies concerned to make corrections for the VAT wrongly applied under the reverse charge mechanism on directors’ fees.
- Companies must make all the corrections in one go for all affected years in the annual VAT return to be filed within the closest legal deadline.
- From a practical standpoint, the MyGuichet.lu procedure has the following interesting features:
- The request can be submitted even if the director is no longer registered for VAT.
- If the director indicates that they are registered for VAT solely due to their directorship activities (no other economic activities falling within the scope of VAT), they will automatically deregister for VAT by ticking the “director only” box.
- It is possible to select the years for which a regularisation is requested and complete the client details (name, VAT number, amount invoiced excluding VAT, amount of VAT invoiced).
- For each year, the director must indicate the amount of VAT debit balance reported in their VAT return and paid.
- There is no need to attach documents to the request.
- A proxyholder may access this procedure on behalf of a director.
In view of the above, it seems that the lengthy debates about the VAT regime for directors have come to an end and the VAT authorities are keen to regularise the situation in the most efficient way.
How can we help?
Our VAT team is available should you require any further information or assistance in relation to VAT and directors’ fees.
