OUR INSIGHTS AT A GLANCE

  • The director of a Luxembourg limited company is jointly liable for the payment of the VAT to the Treasury when his failure to carry out its obligations is considered as a fault.
  • The District Court of Luxembourg concluded that the non-payment of the VAT is constitutive of a fault if the director gives priority to the payment of the salaries to employees over the payment of the VAT to the Treasury.
  • Directors should be aware of the VAT obligations of the company they manage to avoid potential joint liability towards the VAT authorities.

The director of a Luxembourg limited company is jointly liable for the payment of the VAT to the Treasury when his failure to carry out its obligations is considered as a fault. On 24 November 20211, the District Court of Luxembourg concluded that the non-payment of the VAT is constitutive of a fault if the director gives priority to the payment of the salaries to employees over the payment of the VAT to the Treasury.

Background

Mr. A. was director of a limited company between 2017 and 2019. While the company was in a precarious financial situation, Mr. A. took the decision to pay the salary of employees instead of the VAT due to the Treasury. The company finally went bankrupt in 2019 and the VAT authorities considered that Mr. A. was personally and jointly liable for the payment of the VAT debt of the company. The position of the VAT authorities was notably based on article 67-1 of the Luxembourg VAT law. Based on this provision, directors have the obligation to ensure that the company they manage is compliant with the VAT law and that the VAT is paid to the Treasury with the financial means of the company.

Mr. A. introduced a claim against the decision of the Director of the VAT authorities ("Bulletin d'appel en garantie") arguing notably that the non-payment of the VAT was not the consequence of a fault in the case at hand.

Position of the Luxembourg District Court

In carrying out its analysis, the Court reviewed the criteria to be met to engage the liability of directors. Articles 67-2 and 67-3 of the VAT law detail these conditions.

  • First condition: Non-fulfillment of the company's VAT Obligations

In the case at hand, the District Court concluded that the company did not fulfill its VAT obligations as the VAT due to the Treasury was unpaid.

  • Second condition: Non-fulfillment of the company's VAT obligations results from a fault of the director.

In its reasoning, the District Court started by recalling that the liability of a director can be engaged only in case of faulty non-execution of its obligation. Mr. A, as a director, had the obligation to ensure that the company managed was compliant with the VAT law and that the VAT due was paid to the Treasury with the financial means of the company.

Since the company did not pay the VAT to the Treasury, the District Court checked whether the non-payment was the consequence of a fault of Mr. A. In other words, did the director took all the possible reasonable actions to have the VAT paid to the Treasury? Based on the file submitted to the District Court, it appeared that the Director gave priority to the payment of the salaries over the payment of the VAT. Following these salary payments, the company had not enough financial means left to pay its VAT debt to the Treasury. On that ground, the Court concluded that the company had the financial means to pay its VAT liability and that the non-payment resulted from a choice of the director to give priority to the payment of the salaries. According to the Court, such a choice of the director was constitutive of a fault and the VAT authorities were therefore well founded to seek its liability.

Actions to be taken

The outcome of this case should draw the attention of directors on their own liability with respect to the VAT obligations of the companies they manage. While paying the VAT to the Treasury following the filing of VAT returns is obvious, attention should also be paid to companies not registered for VAT but having obligations to do so. This could notably be the case for companies with VAT exempt turnover (e.g. interest income earned from EU borrowers) receiving taxable services from abroad and being not registered for Luxembourg VAT purposes.

We strongly recommend that directors review the VAT status of the companies they manage to ensure compliance with the Luxembourg VAT law and to avoid potential risks of joint liability. available to discuss the outcome of that case and to perform VAT compliance sanity checks.

Footnote

1 2021TALCH08/00162

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