On 30 September 2016, the Luxembourg VAT authorities released the long-awaited Circular on the VAT treatment applicable to directors' fees. The Circular confirms that directors' services constitute an economic activity and indicates the director's status of VAT taxable person, irrespective of whether this activity is exercised by an individual or by a company.
Directors' services are therefore subject to Luxembourg VAT at the rate of 17 % when invoiced by a Luxembourg director to a Luxembourg company. Consequently, the VAT registration of the Luxembourg directors is now required.
In the event the director would be established outside of Luxembourg, Luxembourg VAT would be due under the reverse charge mechanism by the VAT registered Luxembourg company which benefits from the director's services.
The circular also reaffirms that directors acting within the framework of an employment contract are not independent and are therefore not considered as VAT taxable persons.
Small enterprise scheme and "honorary" directors
Provided notably that the annual turnover of a director does not exceed a threshold of EUR 25,000.00, the Circular specifies that the small enterprise scheme would be applicable to that director. In such a case, no VAT would be applicable on the services rendered by the director but, as a consequence, no VAT deduction right would be recognised. A VAT registration is nevertheless required in such a case.
Furthermore, "honorary" director services would benefit from a specific VAT exemption already in force in the current Luxembourg VAT Law. According to the Circular, "honorary" directors are those which only receive an indemnity considered as a defrayal. No additional detail is provided by the Circular in order to determine the scope of the notion of "defrayal".
VAT exemption for the management of investment funds
No guidelines are given by the Circular on the application of the VAT exemption foreseen for the management of investment funds (article 44, § 1, d. of the Luxembourg VAT Law). Nevertheless, significant arguments exist to defend that director services at the board of regulated funds should be covered by this VAT exemption and therefore should not be subject to VAT.
Consequences of the Circular on your business
The strict observance of these rules is required as from 1 January 2017. These measures imply both an additional VAT cost for companies with no or limited VAT deduction rights, as well as the added burden of VAT registration of the Luxembourg directors and related VAT compliance.
Originally published 3 October 2016
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.