VAT treatment of directors' fees (C-288/22)

On 21 December 2023, the Court of Justice of the European Union (the “Court“) ruled on two questions referred for a preliminary ruling by the Tribunal d’Arrondissement of Luxembourg (the “Tribunal“). The Tribunal sought clarification as to whether the activity of a member of the board of directors of several public limited companies incorporated under Luxembourg law (the activity of “Director“) could be qualified as an economic activity carried out in an independent manner within the meaning of Directive 2006/112/EC on the common system of value added tax (the “DVAT“).


TP is a member of the board of directors of several public limited companies incorporated under Luxembourg law. In this context, his activity consists, inter alia, in discussing strategic proposals, the choice of operational managers and issues relating to the accounts of these companies.

In his capacity as a Director, TP received fees on the profits made by these companies, as decided by the general meetings of shareholders.

After receiving an assessment form for the purposes of value added tax (“VAT“) on this income, TP lodged a claim, arguing that his activity did not constitute an economic activity within the meaning of the law on value added tax (“LVAT“) and therefore did not qualify him as a taxable person.

The Director of Administration rejected the claim on the grounds that the Directors were independently engaged in an economic activity and that their fees should therefore be subject to VAT. TP then brought an action for annulment of that decision before the Tribunal, which decided to stay proceedings and referred two questions to the Court for a preliminary ruling:

  • Does the activity of a natural person as a Director constitute an economic activity and, in that regard, are the fees received to be regarded as remuneration for services rendered?
  • Does a natural person carry out his activity as a Director independently?

The economic activity

Carrying out an economic activity is one of the conditions to quality as taxable person for VAT purposes. The DVAT lists several activities that qualify as economic activities, including the supply of services for consideration within the territory of a Member State by a taxable person acting as such. TP has supplied a service, and the Tribunal thus questions whether the service is to be considered as being supplied for consideration, which implies a direct link between the service and the consideration actually received by the taxable person. The consideration must also be proportionate to the service supplied, foreseeable and, in principle, must ensure that the supplier receives payment for its services. According to the Court, that direct link is established if the remuneration received by TP is flat-rate.

Moreover, the existence of such a supply of services is not sufficient to establish the existence of an economic activity. In this sense, an activity is generally classified as economic if both the activity and its remuneration are of a permanent nature. The appointment of TP as a Director for a renewable term of up to 6 years confers on its activity a permanent character. This term of mandate also confers a permanent character on the remuneration if it is paid in the form of fees. The Court also stated that, in order to preserve the permanent nature of such fees, which are allocated on the basis of the profits made, it must be possible to allocate fees to Directors even in the absence of profits.

On the basis of those factors, the Court concluded that a Director carries out an economic activity where he provides services for consideration to the company of which he is a Director and where that activity is of a permanent nature and is carried out in return for a remuneration the fixing of which is foreseeable.

The independence of the activity

The existence of a subordinate relationship in the exercise of the activity is the decisive criterion for determining whether the activity is carried out on an independent basis. It is necessary to analyse whether the activity is exercised in the own name, for the own account and under the own responsibility of the person, and whether this person bears the economic risk associated with the activity.

TP did not have a casting vote on the boards of directors, did not represent or manage the day-to-day business of the companies and was not a member of any management committee.

In determining the independence of his activities, the Court took into account:

  • The absence of any hierarchical subordination: in the context of his advisory and decision-making activity within the board of directors, the Director is free to submit to the board the proposals and advices he wishes and to vote as he wishes within the board, although he must abide by the decisions of the latter;
  • The fact that he acts on his own behalf and under his own responsibility: it is the company itself that has to face the negative consequences of the decisions taken by the board of directors; it is the latter, and not TP, that bears the economic risk of the Directors;
  • The fact that he freely organises the way in which he carries out his work and receives the fees constituting his income himself will have to be verified by the Tribunal.

The Court therefore concluded that the activity of Director is not carried out independently where, despite the fact that the Director freely organises the way in which his work is carried out, receives the remuneration constituting his income himself, acts in his own name and is not subject to a hierarchical relationship of subordination, he does not act on his own behalf or under his own responsibility and does not bear the economic risk associated with his activity.

What’s next?

According to the settled case-law of the Court, the right to obtain a refund of taxes levied in a Member State in breach of the rules of the law of the European Union (the “EU law”) is the consequence and the complement of the rights conferred on individuals by the rules of the EU law as interpreted by the Court. The Member State is therefore in principle obliged to reimburse taxes levied in breach of the EU law.

Following the ruling of the Court, the effects of Circular No 781 of 30 September 2016 (which states that Directors are considered as taxable persons under VAT rules) have been suspended with immediate effect by a Circular issued on 22 December 2023 (Circular No 781-1) by Luxembourg tax authorities, pending the decision of the Tribunal.

The Luxembourg tax authorities also stated that, once the judgment has been rendered by the Tribunal, they will ensure that the VAT is regularised by the end of the 5 years prescription period. A detailed Circular will be issued and will notably be addressed to companies whose directors have invoiced them for VAT and who will be required to bring their right to deduct VAT into line with the new legal situation. Appeal remains open for directors whose VAT assessment was issued less than 3 months ago.

Finally, in order to determine whether TP actually exercises a supply of services, where his remuneration is in the form of fees, the Tribunal will have to consider whether, in cases where companies make little or no profit, the general meeting of shareholders of such companies may nevertheless, on the basis of other factors, grant TP a level of remuneration that can be considered objectively commensurate with the service provided by the latter. It will also have to verify whether TP has freely organised the way in which he carries out his work and whether he has himself received the fees constituting his income in order to determine whether he exercises his activity independently.

For more information or assistance on this topic, you may reach out to our Tax team at

Samia RABIA, Partner Brouxel and Rabia Luxembourg Law Firm
Olivier Thill, Counsel - Head of Tax
Olivier THILL


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