New VAT Circular Clarifying Treatment of Directors' Fees
On 30 September, 2016, the Luxembourg indirect tax authorities issued a circular (Circular N° 781) clarifying the treatment of the activities rendered by company directors from an indirect tax perspective.
The circular specifies that the activity of independent directors (remunerated through directors’ fees) should be considered as an economic activity, and more specifically a supply of services, said directors thus being taxable persons for VAT purposes for their supply of management services.
When the place of taxation is Luxembourg, the standard VAT rate applies (currently 17 percent). Should this service be rendered to a Luxembourg VAT registered person by a non-Luxembourg resident director, the former then becomes liable to Luxembourg VAT, in line with the reverse charge mechanism, as recipient of the services.
The circular underlines that employees acting as directors on behalf of their employer do not act independently and are, as such, not VAT taxable persons, the VAT taxable person in that case being the employer they represent.
Taxable persons established within Luxembourg may benefit from the small enterprises franchise, as foreseen under article 57 of the VAT law, provided that the conditions of this article are met (in particular, the annual income from this taxable activity must remain below a EUR 25,000 threshold).
If rendered in the context of an honorary activity, the supply of services is exempt in application of article 44, §1, point w. The circular stipulates that, to be considered as honorary, the indemnity paid for the activity should be a cost-reflective compensation.
Finally, the circular indicates that a strict application of the above described rules will be required as from 1 January 2017. Strengthened scrutiny of those activities by the indirect tax authorities can thus be expected in the year to come.
It is interesting to note that, although the circular provides useful guidance on the VAT treatment of director’s fees for companies, it does not provide any dedicated clarification on fund management services rendered by investment funds’ directors which should thus be analysed on a case-by-case basis.