On September 30th 2016, the Luxembourg VAT Authorities (Administration de l’Enregistrement et des Domaines) published circular letter No. 781 dealing with the VAT treatment applicable to services provided by independent company directors (the “Circular”). A series of frequently asked questions is also available on the website of the VAT Authorities.
The administrative guidance provided by the Circular was eagerly awaited after the confirmation, in early 2016, by the Luxembourg VAT Authorities to the Luxembourg Association of Company Directors that directors’ fees are subject to VAT (please refer to our April 2016 Newsletter).
The services provided by independent directors to the companies they managed should be subject to VAT at the standard rate of 17% in case the services are deemed to be located in Luxembourg.
The Circular recalls that the services provided by independent directors to the companies they managed are to be considered as an economic activity within the meaning of the Luxembourg VAT law and should thus be subject to VAT at the standard rate of 17% in case the services are deemed to be located in Luxembourg.
An exemption may, however, be available for purely honorific activities, where the consideration paid to the director is a mere compensation for costs incurred. Although this point is not covered in the Circular, the general exemption for fund management services may also apply to fees charged by directors to investment vehicles that benefit from this VAT exemption.
The VAT Authorities further confirm that the reverse charge mechanism applies to services provided by non-resident directors to Luxembourg companies, which either qualify as VAT taxable persons or are VAT registered non-taxable legal entities.
According to the Circular, employees that are appointed company directors as representatives of their employers should not be considered as acting independently and should thus not qualify as VAT taxable persons. Their employer should instead register for VAT purposes and account for its employees’ directorship activities.
The Circular finally specifies that VAT taxable independent directors as well as Luxembourg entities liable to declare the VAT on directors’ fees under the reverse charge mechanism should make sure that they comply with the VAT rules and the content of the Circular as of January 1st 2017. In this respect, it should be noted that the law voted on December 14th 2016 increases the penalties that may be applied in case of non-compliance with the VAT law.