“…it results in additional work and cost for the director, who mostly does not have an administrative or tax department or structure he can rely on.”
On 14 February 2017 the Luxembourg tax authority (AED) issued a circular (No:781) relating to the fees paid to independent directors in Luxembourg, aiming to clarify the situation with regards to VAT and direct tax.
This clarity has resulted in a significant burden on directors. The reforms introduced by the new tax regime of Law No7020, impose additional obligations on directors making their work a lot more cumbersome than before.
In an interview with Delano as part the Tax Talk series, David Arendt, partner at The Directors’ Office in Luxembourg, explained the impact of these changes and gave his personal view on their effectiveness.
He began by explaining the facts:
“As a result of clarifying circular issued by the AED, from 1 January 2017 directors’ fees, with certain exceptions, are expressly subject to VAT at the rate of 17%. VAT is chargeable on the gross amount of the fee, i.e. before withholding tax.”
Prior to that he said:
“The AED had taken the view that directorships are vatable services, (services exempt from VAT) a view not shared by all fellow European tax administrations, including that of Belgium.”
“This means that director’s fees are now subject to both a direct taxation (including a non- final 20% withholding tax owed by the company paying the fee) and indirect taxation (i.e. the 17% VAT). A director who must charge VAT for serving on boards needs to obtain a VAT number from the AED, with certain exceptions, and file periodic (monthly or quarterly) tax returns.”
For Arendt the amount of additional work this creates makes him question whether it is worth it for anyone as, “…it results in additional work and cost for the director, who mostly does not have an administrative or tax department or structure he can rely on.”
“The return on investment for the AED is also doubtful, at a time when this administration publicly complains it has inadequate human resources.”
“For the paying company, the withholding tax paid to its directors does not give rise to a tax deduction. There is thus a regrettable double taxation of the same service by the paying entity and the payee.”
It gets more complicated.
“At the same time as the tax regime applicable to directorships has deteriorated, the liability of directors has increased as a result of legislative changes introduced by the new tax law (7020). For instance, directors are responsible for the payment of taxes (both direct and indirect) by the companies on whose board they serve.”
Arendt summarised his personal view as follows:
“Having professional, competent directors on the board of domestic companies is a necessity to improve corporate governance and substance of local and foreign owned entities establishing subsidiaries in Luxembourg alike. Our legislation should enable and encourage this objective, including by offering a simple and fair taxation of both corporation and directors. Also, scarce AED resources should not be deployed for collecting taxes that do not cover the costs engaged for this purpose.”