The European Court of Justice, rendered on 21 December 2023, a decision regarding the classification of directors’ activities within the framework of Luxembourg VAT law. It established that members of the board of directors of a public limited company is not deemed to act independently, as per the relevant provision, when they receive their income directly, act on behalf of the company without assuming personal economic risks, and are not subject to hierarchical subordination. This decision deviates from the stance previously held by Luxembourg VAT authorities, impacting both directors and companies.

The practical implications of this ruling are multifaceted. Directors, under the new interpretation, may deregister for VAT, ceasing invoicing and VAT collection processes. Consequently, administrative burdens would diminish, though the ability to deduct VAT on costs would be forfeited, potentially leading to reimbursements to the VAT authorities. Notably, directors of investment funds are unlikely to be affected due to existing exemptions.

The Court’s decision directly challenges Circular 781 issued by the Luxembourg VAT authorities, published on 30 September 2016, which subjected directors’ services to VAT.

Consequently, the Luxembourg VAT authorities have suspended this circular following the ruling, offering guidance for VAT refund requests dating back to 2018. Practical measures include issuing rectifying invoices and preparing for a forthcoming regularization process through the administrative web portal.

As directors reassess their VAT status and compliance obligations, a case-by-case analysis becomes imperative to determine optimal strategies in light of the legal developments.

Should you have any inquiries or require expert guidance pertaining to the information provided, our tax team is available to assist you. Please feel free to contact us.