On 30 September 2016, the Luxembourg indirect tax administration (LTA) issued a circular n°781 confirming that director fees are subject to VAT (the Circular). As reported in our previous e-alert on this matter circulated in February (click here), this position is fully in line with Luxembourg VAT law (LVAT) and the position of the EU Commission. The Circular does however not provide for any clarifications regarding the application to director fees of the VAT exemption for management services provided to investment funds.
The Circular confirms that directors qualify as taxable persons for Luxembourg VAT purposes. Accordingly, their services should be subject to VAT at the current rate of 17%. However, directors, who carry out their mandate in the name of, and on behalf of, their employer, are not considered as taxable persons for VAT purposes.
The Circular also confirms that director fees are subject to VAT in Luxembourg under the reverse charge mechanism, where services are supplied by a non-Luxembourg director to a taxable person registered to VAT in Luxembourg.
Directors may benefit from the small enterprises scheme (régime de franchise) if their annual taxable turnover does not exceed the yearly EUR 25,000 threshold. In practice, this means that directors falling under this specific regime will not have to include VAT on their invoices.
Article 44, paragraph 1, w of the LVAT also provides for a specific VAT exemption of attendance fees (jetons de presence) paid in consideration for an honorary activity. The Circular confirms that a director’s activity is considered as honorary, if the attendance fees merely cover the expenses incurred by the director.
The Circular expressly mentions that these rules will be applied strictly as of 1 January 2017.
Directors, who fall within the scope of these rules, should thus register for VAT purposes in Luxembourg as soon as possible. They will need to issue invoices and file VAT returns in accordance with the requirements of the LVAT. For companies that are not VAT taxable persons or that have no VAT deduction rights, the VAT on director fees will be a final cost. Companies and their directors should also consider reviewing their agreements to clarify whether the agreed remuneration is exclusive or inclusive of VAT (if necessary).
Unfortunately, the Circular provides no guidance regarding the application of the VAT exemption for management services to director fees.
In our view, director fees received by directors managing investments funds could in principle be VAT exempt under article 44, 1 d) of Luxembourg VAT law. This article provides for a VAT exemption for services consisting of the management of investment funds. According to European case-law, the term “management” corresponds to all services that are essential and specific to the management of the fund. Directors could benefit from this exemption if these conditions are met. This should be analysed on a case-by-case basis.
