Although less detailed than expected, the circular-letter published by the VAT Administration confirms that independent directors have the status of taxable persons in Luxembourg and that director fees are in principle subject to VAT at the rate of 17%. The circular-letter should be read in the light of the Frequently Asked Questions (“FAQs”) and answers published on the same date on the website of the Luxembourg VAT Administration.
VAT status of directors
Company directors acting independently have the status of taxable persons. As such, they will have to comply with all the obligations imposed by the Luxembourg VAT legislation as of 1 January 2017.
Employees exercising the functions of company director in representation of their employer do not act independently and should therefore not be considered VAT payers. Here, the employer (represented by one of its employees) will be considered the VAT payer supplying the services.
> Small businesses
Company directors, the annual qualifying turnover of which does not exceed EUR 25.000 (possibly EUR 30.000 as of 2017), fall within the scope of the so-called “franchise for small businesses” regime and are not subject to most of the obligations of VAT payers. The franchise regime does not apply to foreign directors.
Taxation of services supplied by company directors
Director fees are subject to Luxembourg VAT if the services supplied by the company director take place in Luxembourg according to Article 17 of the Luxembourg VAT law.
> Place of supply
Services rendered by company directors are deemed to take place in Luxembourg:
- If the company director is established in Luxembourg and the recipient is a Luxembourg-based company or a foreign company not engaged in taxable activities; or
- If the company director is not established in Luxembourg but supplies services to a Luxembourg-based company engaged in taxable activities (even if the activities of the companies are exempt from VAT, e.g. financial activities).
> Non-application of the VAT / Exemptions
Director fees relating to services taking place in Luxembourg will not be subject to Luxembourg VAT in the following situations:
- If the company director falls under the franchise regime applicable to small businesses.
- If the company director benefits from the “honorary activities” exemption. According to the circular-letter, the activity of a director is “honorary” if the indemnity (attendance fee) is paid as a contribution towards their expenses. The circular-letter remains silent as to the notion of “contribution towards the expenses” (“défraiement”). In practice, it is assumed the attendance fee should be limited, and the exemption should not benefit the company director if his/her expenses are reimbursed otherwise.
- If the services qualify as management services of a investment fund. Although the circular-letter does not address this topic, fees paid to directors of investment funds should continue to benefit from the exemption applying to the “management of investment funds”, provided that the services in question can be characterized as management services of a qualifying investment fund ( within the meaning of Article 44.1.d of the Luxembourg VAT law, as interpreted in the light of the case law of the European Court of Justice and the circular-letters 723, 723bis and 723ter of the Luxembourg VAT Administration).
VAT obligations of company directors
- VAT registration
Company directors established in Luxembourg should be effectively registered with the VAT Administration as from 1 January 2017.
VAT registration is made by filing an initial declaration with the competent VAT office (initial declaration for natural persons or legal persons, depending whether the company director is a private individual or a legal person). To determine which VAT office is competent for VAT registrations of VAT payers, please visit http://www.aed.public.lu/functions/contact/recherche/tva/index.html.
VAT payers benefiting from the franchise regime applicable to small businesses, should in principle also register for VAT purposes through the filing of an initial declaration.
As VAT payers, company directors must make sure that invoices are issued for the services they supply to (i) any other VAT payer or (ii) any legal person that is not a VAT payer.
According to the rules set forth under Article 63 of the Luxembourg VAT Law, invoices may be issued by the company director or by the recipient (self-invoicing by the company) or by a third party. Invoices must be issued on the 15th of the month following the month during which the service took place at the latest, or in case of an advanced payment, at the latest upon payment of the advance.
VAT payers benefiting from the franchise regime applicable to small businesses, should in principle also issue invoices to (i) other VAT payers or (ii) any legal persons that are not VAT payers, even if their services are not effectively subject to VAT.
- Filing VAT returns
Company directors should file periodic VAT returns. The periodicity will depend on the amount of the annual turnover.
VAT payers benefiting from the franchise regime applicable to small businesses, are not obliged to file VAT returns if their services solely take place in Luxembourg. In this case, company directors should only inform the VAT Administration of their annual turnover before 1 March of the following year.
Company directors supplying services taxable outside Luxembourg, cannot benefit from the franchise regime applicable to small businesses. They must therefore report the part of the turnover relating to their services taxable outside Luxembourg, and file the EC listings relating to such services.
- Payment of Luxembourg VAT due
> Liability to pay the VAT
Company directors established in Luxembourg are liable to pay de VAT on the services supplied to Luxembourg-based companies. If the services are supplied by directors not established in Luxembourg, the VAT on director fees will have to be self-reported by the Luxembourg-based company through the reverse charge mechanism.
> VAT rate
The current Luxembourg VAT rate applicable in principle to services rendered by company directors is 17%.
> Taxable amount
The amount on which the Luxembourg VAT will be calculated is comprised of all consideration paid for the services supplied by company directors, i.e. everything that constitutes a consideration obtained or to be obtained by company directors from customers or third parties. Though the circular-letter is not specific on that point, it can be inferred from the FAQ’s that percentage fees paid to company directors are considered part of the taxable amount. This taxable amount includes all taxes, duties, levies and charges, excluding the VAT itself. Withholding taxes on director fees are therefore part of the taxable amount for VAT purposes.
Director fees paid by Luxembourg based companies might be subject to VAT even if the director is a private individual established in a jurisdiction where he/she is not considered a taxable person for his/her mandate as director. This would for example be the case if a private individual established in Belgium received director fees from a Luxembourg based taxable person.
Besides the possible VAT leakage this situation could create, the VAT regime confirmed in the circular-letter 781 might also have indirect consequences on the VAT status of companies paying director fees. Where for example a Luxembourg-based company paying director fees only has an exempt turnover (therefore not registered for VAT purposes), it may need to register for VAT purposes solely for the purpose of self-assessing the Luxembourg VAT due on director fees paid to a foreign director.
Any delay in complying with VAT obligations may trigger penalties as of 1 January 2017. We therefore recommend that company directors carefully consider their VAT situation and VAT registration as soon as possible.
Although the new VAT status of company directors will imply some red tape, it may have some advantages. As taxable persons, company directors should have the right to deduct upstream VAT. One of the conditions for this is to keep evidence of input VAT charged on director’s expenses. The question should also be raised whether company directors could claim for a partial recovery of past VAT incurred on the purchase of investment assets.
Tiberghien Luxembourg would be happy to help company directors assess their situations in light of this recent and important development.
Please feel free to contact:
Jean-Luc DASCOTTE - Partner (firstname.lastname@example.org)
Valérie BIDOUL - Senior Associate (email@example.com)