A director is not a VAT taxable person

A closer look

On 21 December 2023, the Court of Justice of the European Union (CJEU) ruled in its “TP” case (C-288/22) that a natural person acting as a director of a commercial company is not a taxable person for VAT. This decision contradicts the position of the Luxembourg VAT authorities and will have a substantial impact on directors and the companies they are directors of in Luxembourg. They should also examine the impact in other EU Member States where they have subsidiaries or directorships.

Background

On 30 June 2016, the Luxembourg VAT authorities issued its circular 781 to clarify that a director of company is a VAT taxable person. Therefore, their fees are subject to VAT unless they could benefit from an exemption, such as the small undertaking regime (with turnover of less than €35,000) or the fund management exemption in article 44.1.d) of the Luxembourg law. This clarification implies different administrative obligations, such as registering for VAT, filing VAT returns and issuing compliant invoices. It also implies a financial cost for companies which have no, or a limited, right to VAT deduction (e.g., banks, insurances, management companies of investment funds, some professionals of the financial sector, and real estate companies).

This clarification was necessary because, at that time, different approaches were being applied in Luxembourg. Some companies were considering the director as the “organ” of the company, and thus not a VAT taxable person; this approach can be found in Belgium and France. At the same time, others were considering a director’s activity as a service subject to VAT as this is generally the case of services, and in light of the fact that, in 2015, the European Commission questioned Belgium about its interpretation.

The need for a clearer definition resulted when a Luxembourgish lawyer, Mr. TP, who is also non-executive director of different companies in Luxembourg decided not to apply the VAT on fees he received as a director. The VAT authority assessed him, which he refused; the case was brought to the Luxembourg Civil Tribunal, which then referred the case to the CJEU. The Tribunal asked to the Court to clarify if a natural person who is a member of the board of directors of a public limited company (“société anonyme”) in Luxembourg is considered to carry out his or her activity “independently,” and if percentage fees received for this activity must be regarded as remuneration paid in return for the services provided to that company.

Decision of the Court

On 21 December 2023, the Court decided that “the activity of member of the board of directors of a public limited company under Luxembourg law is not exercised independently, within the meaning of this provision, when, despite the fact that this member freely organizes the terms of execution of his work, he himself receives the emoluments constituting his income, acts in his own name and is not subject to a link of hierarchical subordination, he does not act on his own behalf or under his own responsibility and does not bear the economic risk linked to his activity”.

Impact in Luxembourg

The decision of the Court contradicts the position of the Luxembourg VAT authorities and has substantial consequences for both directors and companies.

Generally speaking, directors would, be able to deregister for VAT and stop issuing invoices, collect VAT from companies and remit it to the VAT authorities; and stop filing returns; their administrative tasks would thus be reduced. On the other hand, they will no longer be able to deduct VAT on their costs and they might even be obliged to reimburse the VAT authorities with any VAT they have deducted in the past years.

Directors of investment funds and similar entities addressed in article 44.1.d) of the Luxembourg VAT law (“fund management exemption”) should not be affected by the decision because their remuneration is already not subject to VAT as a result of this exemption, implying that they are, in principle, not obliged to register for VAT or file VAT returns.

Excluding investment funds, companies with zero, or limited, right to VAT deduction will likely welcome the decision; as they will no longer have to pay and incur the VAT on director fees, their burden of non-deductible VAT will decrease.

Impact in other EU Member States

Due to the diverging interpretations in the EU Member States, they may have to adapt their position to comply with the CJEU’s decision which is directly and immediately applicable throughout the EU.

This decision will certainly have a substantial impact in Luxembourg. Directors will see their administrative tasks decrease, and companies with zero, or limited, right to deduct VAT (excluding investment funds) will get relief from the non-deductible VAT tax burden. Some practical aspects, such as the potential refund of VAT paid in the past, remain to be answered. Due to the divergent interpretations in the different EU Member States before this decision, directors and companies should examine the impact in other EU Member States where they have subsidiaries or directorships.

The Deloitte Luxembourg Indirect Tax team remains at your disposal to discuss the potential impact on your organization.

¹For further details, we refer to our newsletter of 18 July 2023 Advocate General opines on VAT impacts for directors