On 21 December 2023, the Court of Justice of the European Union ("CJEU") delivered its highly anticipated judgement following the preliminary ruling referral by a Luxembourg court regarding the VAT regime applicable to an individual acting as director of Luxembourg public limited liability companies.

The CJEU found that the activity under review is not carried out independently, thus impacting the existing Luxembourg VAT treatment of such activity.

The judgement is also relevant for other jurisdictions which consider the activities of independent directors as an economic activity within the scope of VAT.

Luxembourg framework

In order to clarify the VAT treatment of directors' activities under Luxembourg VAT law and Council Directive 2006/112/EC of 28 November 2006 ("VAT Directive"), the Luxembourg VAT authority ("AEDT") issued Circular n° 781 on 30 September 2016. The Circular provides that the activity of company director shall be considered as an economic activity consisting in the provision of services and therefore such directors are to be considered as a taxable person under VAT rules. As a result, directors' fees are subject to 17% VAT in Luxembourg without distinction whether the director is a natural person or a corporate entity.

Certain exemptions remained applicable under conditions, such as the exemption of management services provided to certain investment funds.

This treatment entails several consequences for Luxembourg directors, such as the obligation to register for VAT, issue invoices to the company for which they act as director and file VAT returns. At the level of the company to which the service is supplied, the deduction of the VAT paid will depend on the company's deduction right and could lead to the VAT to be a final cost. Where the director is non-resident, the Luxembourg company should apply the reverse charge mechanism.

Case leading to the preliminary ruling

A Luxembourg individual was acting as director of several Luxembourg public limited liability companies (the "Director"). For his role, the Director received a percentage fee and considered that VAT did not apply. The AEDT subjected the percentage fee to VAT and the AEDT's director confirmed the ex officio assessment based on Circular n° 781.

The Director challenged the decision before the Luxembourg District Court and argued that the activity of a director is not carried out independently but as a member of the board representing the company. Further, the Director contended that in assessing whether the activity is carried out independently, "it is necessary to check whether the person concerned performs his activities in his own name, on his own behalf and under his own responsibility, and whether he bears the economic risk associated with carrying out those activities" as set by the CJEU IO case (C-420/18).

The Luxembourg District Court decided to refer to the CJEU the following questions:

  • Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out an "economic" activity within the meaning of Article 9 of the EU VAT Directive and more specifically, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?
  • Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out his or her activity "independently", within the meaning of Articles 9 and 10 of the EU VAT Directive?

Advocate General Kokott issued her opinion on 13 July 2023 and took position in favor of the absence of an independent economic activity (see our previous newsflash).

CJEU judgement

In its analysis, the CJEU took into consideration the specifics of the role of the Director. Notably, the fact that latter did not have a casting vote within the boards of directors, did not take part to the day-to-day management of the companies and was not part of the management committee as defined under the Luxembourg companies' law.

Is the Director engaged in an economic activity?

On the question whether there is an economic activity, the CJEU's review is twofold.

The CJEU found that the activities of the Director can be considered as a supply of service for a consideration in case he received a predetermined lump-sum remuneration and in case the Director was remunerated by a percentage fee, subject to confirmation by the referring jurisdiction that the variable fee could be paid if the company did not realize profits or in case it realized limited profits while remaining adequate to the services supplied.

On whether the Director' services constitute an economic activity, the CJEU considered whether the activity is permanent in nature and carried out in return for remuneration which is received by the person carrying out the activity and the person obtains income therefrom on a continuing basis.

The facts that the Director was nominated for a renewable 6-year term can give the activity a permanent character and the possibility of ad nutum revocation as well as the possibility of resignation does not affect such permanent character, according to the CJEU. The length of the term is also indicative of the permanent character of the remuneration subject however to the possibility that a percentage fee depending on the company's profits can be allocated to the directors even the years the company is in a loss position.

The CJEU concludes on question 1, that Article 9(1) of the VAT Directive must be interpreted as meaning that a member of the board of directors of a public limited company governed by Luxembourg law is engaged in an economic activity, within the meaning of that provision, if he provides services to that company for consideration and if that activity is of a permanent nature and is carried out in return for remuneration the fixing of which is foreseeable.

Is the Director's activity carried out independently?

The CJEU recalled that the question should be analysed under Article 9 of the VAT Directive. For the purposes of this assessment, the relationship of employer and employee referred to in Article 10 of the VAT Directive should also be assessed to determine whether an economic activity is conducted independently.

In its assessment of the employer-employee relationship, the CJEU recalled the IO Case (C‑420/18,) which held that the complete absence of any employer-employee relationship, as well as the fact that the person concerned acts on his own account and under his own responsibility, is free to arrange how he performs his work and himself receives the emoluments which make up his income should be taken into account.

Leaving the first two criteria to be determined by the referring court, the CJEU held that the fact that the Director is free to submit to the board of directors the proposals and advice that he wishes and to vote within it as he sees fit is an indication of the absence of such a relationship. The fact that the director must comply with the board's decision does not change this conclusion as the Director's role is not to apply or implement such decisions.

According to the CJEU, in assessing whether the member of a board of directors acted in his own name, on his own account and under his own responsibility, it is necessary in particular to take into account the national legal rules governing the allocation of responsibilities between the members of the board of directors and the company concerned. Where the allocation of responsibilities is similar or equivalent to an employer/employee relationship, if their liability in tort is only ancillary to the liability of the company or the board as a body, it is an indication the board member is not acting under its own responsibility.

Where the member of the board of directors is not acting under his or her own responsibility, it should be considered that he or she acts for the board and the company of which the board is a body.

The CJEU also focused on whether the member of the board of directors of a public limited company under Luxembourg law bears the economic risk of his or her activity at its own level (i.e., disregarding the economic risk borne by the company).

In the case under review, the CJEU, relying on the findings of AG Kokott, considered that the Director does not bear the economic risk of its activities with the board of directors, and it is the company that bears the economic risk resulting from the activity of the board. An additional element taken into account by the CJEU was the fact under national legislation members of the board of directors do not assume any personal obligations regarding the company's debts.

The conclusion is not affected by the fact that the director can be remunerated through a percentage fee based on the company's profits as sharing profits is not equivalent to assuming a personal risk of a profit or loss. The CJEU noted that this conclusion applied all the more in the case where the percentage fees can be paid even where the company suffers losses or liquidated.

Based on the above, the CJEU's answer to the second question raised is that the activity of a member of the board of directors of a public limited company under Luxembourg law is not carried out independently, within the meaning of Article 9(1) of the VAT Directive as he or she bears neither the responsibility nor the economic risk of such activity.


The case will now be referred back to the Luxembourg District Court.

The interpretative judgments of the CJEU are binding for the referring court and in the absence of a specific time limitation in the judgment, CJEU's interpretation is applicable retroactively.

In practice, given the CJEU conclusion that the activity under review was not considered as exercised independently, independent directors meeting the criteria set by the CJEU, should no longer be subject to VAT obligations in the absence of other economic activities.

On 22 December 2023, the AEDT already issued a Circular 781-1 putting on hold the application of Circular 781 until the final decision of the Luxembourg District Court. In addition, the AEDT communicated that once this decision is available, a detailed circular will be issued to ensure proper VAT regularization up to the statute of limitation. A recovery of any VAT unduly paid over the last five years should thus be possible, which is good news for companies incurring directors' fees while having a limited or no input VAT deduction right. Immediate action can be taken by directors against recent VAT assessments, issued less than three months ago, by following the ordinary applicable provisions governing administrative appeals against VAT assessments.

Originally published Dec 22, 2023

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