*** CJEU clarifies that a natural person acting as director of a commercial company  as required by law cannot be regarded as an independent economic activity. *** Following the preliminary ruling, the case will return to the Luxembourg District Court. *** ILA will continue to follow the matter closely. ***
 
In its Circular 781 of 30/9/2016 the “Administration de l’Enregistrement, des Domaines et de la TVA” stipulates that the activity of director constitutes an independent economic activity consisting in the supply of services, hence conferring the status of VAT taxable person. 

ILA wants to stress that, at that time, it defended the opposite interpretation considering the Belgian and French theory that the director is an organ of the company. Indeed, ILA is of the opinion that the services provided by a director, including and in particular as a NED, cannot be regarded as independent economic activity as the director is a member of a statutory body of a company required by law. Furthermore, ILA foresaw that the implementation of the Circular 781 leads to a disproportionate tax burden because the directors’ remuneration is treated differently from the point of view of direct and indirect taxation. Indeed, it is regarded as a service from the point of view of VAT but not from the point of view of direct taxation. This means that the VAT is a cost for those companies with zero or limited VAT deduction right. In addition, for income taxes, the fees paid to directors are non-deductible for corporate tax, implying an additional cost for the companies, but taxable in the hands of the directors.

A Luxembourg District Court dealing with a corresponding complaint by a non-executive director has referred the question to the CJEU. The Advocate General delivered her Opinion on 13 July 2023, proposing that the CJEU should not consider a director to be a taxable person because a natural person member of a body of a company required by law cannot be regarded as carrying out an independent economic activity. Today, the Court of Justice of the European Union decided that the activity of a natural person, member of the board of directors of a public limited company governed by Luxembourg law, is not carried out independently, within the meaning of this provision, where, despite the fact that this member freely organises the manner in which his work is carried out, receives himself the emoluments constituting his income, 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. Such a member of the board of directors therefore does not qualify as a taxable person for VAT (1).

Following this preliminary ruling, the case will return to the Luxembourg District Court that lodged the request. A judgement from the latter is expected in due course providing more clarity on the implications for Luxembourg directors and companies. While it is not possible to predict a timing for the District Court’s decision yet, it is anticipated that the judgment would be pronounced in 2024.
 
ILA will continue to monitor developments closely, discuss them in its committees and work together with its partners and the relevant public authorities throughout 2024 to find a satisfactory solution for all parties involved.

(1) JUDGMENT OF THE COURT (Third Chamber)