Luxembourg Tax / social security rules that apply to directors' remuneration
The below article intends to both refresh on the Luxembourg rules applying to the remuneration paid to board members of Luxembourg companies and share the latest development on the matter.
Introduction - Income qualification from a Luxembourg individual tax perspective
The Luxembourg tax authorities do focus on director’s fees these days more than ever, especially since the circular n° 781 issued on the 30 September 2016 has clarified the applicable VAT treatment. Now that Directors – natural human beings – have to pay VAT on the fees they receive (like corporate entities would be doing) the nature of the fees themselves is questioned again.
Compensation paid out to Board members might be of different nature/qualification from an individual tax perspective depending on the actual type of service it is paid out for:
Self-employment income subject to a specific tax treatment according to the provisions of the Article 91 (1) 2 L.I.R. Typically for the attendance to a board meeting for instance, i.e. a non-executive role;
Employment income if paid to Directors in charge of the day-to-day management of the company (executive director who receives a “salary” tax wise without having any subordination link;
The obligations in the latter case are not further developed below.
Even though, by nature, director’s fees qualify as self-employed income, they are subject to a specific tax treatment which implies that the company paying the fees declares them, withholds 20% taxes and finally remits the taxes to the authorities. Moreover director’s fees are not deductible from a corporate tax point of view (Article 168, al. 3 L.I.R.).
Synoptic table - Tax / social security rules applicable to directors’ fees
If you experience any compatibility issue with the table, please download the .pdf version here.
Use of Personal companies
Over the last years, an increasing number of personal companies, either domestic or localized outside Luxembourg have been incorporated. The directors/managers invoice their services through this personal company.
Structuring the payment of director’s fees in a way a corporate entity is the beneficiary does not necessarily alter the inherent essence of the income, which may remain for the debtor director’s fees. In such situation, the same tax compliance obligations subsist for the debtor.
A Director who is nominated at the board of a company and gets compensated for his/her effective directorship duties, shall he/she prevent the application of the 20% withholding tax simply by using his/her personal company to invoice this services? The question remains open.
The Luxembourg VAT administration issued Circular n° 781 on September 30, 2016 which specifies the applicable VAT treatment on directors’ remuneration: the activity performed by directors qualifies as an economic activity in the sense of the VAT legislation, irrespective of the status of the director being a legal person or an individual.
The services performed by directors thus fall within the scope of VAT. As a consequence, the remuneration paid by Luxembourg Companies to Luxembourg based directors has to be charged with Luxembourg VAT at the rate of 17%, unless an exemption applies. The remuneration paid to directors established outside Luxembourg will also be subject to Luxembourg VAT providing the Luxembourg Company receiving the services is VAT registered in Luxembourg.
From an administrative point of view, the consequences of these rules are that Luxembourg based directors have to be VAT registered, to collect VAT on domestic supplies and remit it to the State, to file VAT returns as well as to issue proper tax invoices. Directors established in Luxembourg can be dispensedfrom the obligation to charge VAT if their annual turnover is lower than 30.000 EUR.
Directors were asked to strictly comply with these rules as from January 1st, 2017.
Sylvie Leick - Partner
+352 42 124 7242
Sylvie is a Partner leading the Luxembourg People Advisory Services practice, an integrated practice combining practitioners from Tax and Advisory to deliver insight and innovation on people, organizational and compliance issues
Sylvie joined Ernst & Young in 2001, she is based in the Luxembourg office and has over 15 years of experience in Luxembourg and international individual taxation, labour law, social security as well as immigration, serving both Luxembourg companies and international clients (including Financial Services clients).
Arnaud Huguenel - Manager
+352 42 124 7099
Arnaud is a manager working within the Luxembourg People Advisory Services practice.
Arnaud joined EY in 2012, and has 6 years of experience in Luxembourg and international individual taxation, labour law, social security as well as immigration.