Advocaten / Avocats / Lawyers

Tuesday, 19 April 2016

Directors' fees and VAT. The Belgian VAT authorities' final position - discussion starts in Luxembourg

The VAT-team

The VAT treatment of directors’ fees is subject to specific rules in Belgium and Luxembourg. These rules are not identical. The applicable rules are however subject to significant changes in both countries. Below we comment on the VAT treatment of directors’ fees in Belgium and Luxembourg and summarise their potential impact.

Belgium

Under the existing rules, directors’ fees received by a natural person fall outside the scope of VAT. For legal entities acting as a director of a company, Belgian VAT rules provide an option about whether or not to apply VAT.

It was originally decided to abolish this optional regime for legal entities acting as a director and to make all directors’ fees subject to VAT from 1 January 2015 onwards. However, given this decision’s major impact and the many uncertainties concerning its practical implementation, the introduction of VAT on the services provided by directors legal-entities was repeatedly postponed (most recently to 1 June 2016).

In an Administrative decision of 30 March 2016, the Belgian VAT authorities have finally published their much-anticipated position regarding the application of VAT to directors’ fees received by legal entities.

From 1 June 2016 onwards, legal entities providing director services for consideration will be subject to VAT. Tantièmes are considered as a consideration for director services and fall within the scope of VAT.

This decision contains a number of (previously announced) concessions, in particular regarding the option to establish a VAT group between the legal entities acting as directors and the underlying operating company. In a situation where multiple legal entities are managed only by one operating company, there is an issue concerning proving the organisational link, which is generally required to establish a VAT unit/group. Following its decision, the administration now accepts that, under such circumstances, a VAT unit can be established provided that (i) the legal entities acting as director are all shareholders of the operating company and together they hold at least 50% of the voting rights and (ii) there is a legal contract between the different legal entities acting as director that imposes unanimous decisions on the operating company’s management.

The decision also provides important clarifications regarding the services rendered by legal entities acting as directors to an operating company with a VAT-exempt main activity (such as doctor’s associations, insurance agents or bank offices). The VAT administration accepts that legal entities acting as directors can make a division between their VAT-exempt activities (such as medical services, insurance intermediary services, etc.) and their VAT taxable directors’ fees. According to the administration, at least 25% of the fees must be considered as taxable directors’ fees. In any case, if such a division is considered, it is advisable to check the relevant agreements and by-laws, and where appropriate, to gain permission from the local VAT administration.

Finally, we note that no specific transitional arrangement has been provided for. The decision only refers to the applicable rules regarding the chargeable event and the VAT liability. If the directors’ fees are due before 1 June 2016, then these fees will not be subject to VAT. It follows that legal entities-directors may profit from invoicing in advance as much as possible. The necessary reservation should be made, however, in the context of the VAT anti-abuse provision. In our view, advance invoicing would need to be objectively justified (other than solely for tax reasons) and should be linked to clear deliverables. As for tantièmes for 2015, it is important that the distribution of tantièmes is decided upon no later than 31 May 2016 to still come within the old regime.

Source: Administrative Decision nr. E.T.127.850 dd. 30.03.2016 (click here, only in Dutch or French)

Luxembourg

Given the developments in Belgium, it is perhaps no coincidence that the VAT status of directors in Luxembourg has recently come under scrutiny. At present there exists no clear legal framework for the VAT treatment of directors’ and/or management fees (with the exception of Article 44.1.w of the Luxembourg VAT law, which provides that services provided in the context of a company’s board member’s honorary activity and remunerated by attendance fees are exempt from VAT; this exemption applies to very small amounts only). The authorities have always maintained that directors’ fees should in principle be subject to VAT. In practice, however, it seems that directors in Luxembourg, both natural and legal persons, have been able to remain outside the scope of VAT for all the fees they receive in the framework of their mandate. To date, there have been no or very few questions asked by the Luxembourg VAT control offices.

Following a recent article in the press, the director of the Luxembourg VAT administration has made clear that directors’ fees should in principle always be subject to VAT. Moreover, the director of the Luxembourg VAT administration has maintained that this clarification does not constitute a shift from the traditional position. He has, however, promised that the VAT authorities will show leniency towards any past situation. According to the latest information received, they would not revisit situations before 2017.

A Parliamentary question was submitted on 10 February 2016 to the Minister of Finance, Mr. Pierre Gramegna, to have this position confirmed. In his answer, dated March 9, 2016, the Minister of Finance announced that a working group will be set up to clarify this issue and to make recommendations. Although the answer is rather ambiguous, it can, in our view, be deduced that the traditional Luxembourg VAT treatment of directors’ fees can possibly not be maintained in the future. All directors’ fees (with the small reservation of Article 44.1.w of the Luxembourg VAT law, the scope of which should be made explicit) should thus, from 2017 onwards, in principle, be subject to VAT. In this respect, it is assumed that no distinction will be made between natural persons and legal entities.

This development in Luxembourg should have a significant impact, given the many directors mandates that are assumed in Luxembourg companies.

This development also raises the question regarding the consequences for Belgian directors who assume mandates in Luxembourg either in a personal capacity or through a legal entity. Regarding natural persons acting as directors, this development may also create a hybrid situation (VAT liability in Luxembourg but no VAT liability in Belgium).

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If you are facing (cross-border) director services matters in Belgium and Luxembourg, then Tiberghien can assist you with the practical implications and advise on potential solutions to the issues at hand.


For more information, please contact our VAT team:

Stijn Vastmans - Partner (stijn.vastmans@tiberghien.com)
Valérie Bidoul - Senior Associate (valerie.bidoul@tiberghien.com)
Stein De Maeijer - Associate (stein.demaeijer@tiberghien.com)
Gert Vranckx - Associate (gert.vranckx@tiberghien.com)
David Verbeke - Associate (david.verbeke@tiberghien.com)

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