Now that the tax reform has entered into force and the late 2016 announcements are effective, we have a better picture of what 2017 has in store for you. In this post, we analyse the five main VAT changes in Luxembourg and explain in detail what they mean to you.
1. Director fees now subject to 17% VAT
The VAT authorities confirmed that independent directors have the status of taxable persons in Luxembourg and that director fees are in principle subject to VAT at the rate of 17%, even if the director is a private individual. It means that Luxembourg-resident directors have to register with the authorities and charge VAT to the company paying the director fees. Either way, this company will self-declare and collect VAT (reverse charge mechanism) when the director isn’t in Luxembourg.
Still, director fees will not be subject to Luxembourg VAT in the following situations:
Employees – any employee serving as a company director in representation of his/her employer doesn’t act independently and is therefore not considered as a VAT payer. Instead, the employer becomes the VAT payer supplying the services.
Small businesses – Company directors, making an annual turnover under 30,000 euros, fall within the scope of the so-called “small undertakings scheme”. Their services remain exempt although they are required to register for VAT and annually declare the amount of their fees. This regime doesn’t apply to foreign directors, meaning that the Luxembourg paying company needs to reverse charge VAT whatever the amount of fees paid.
Honorary activities – According to the new rules, the activity of a director is “honorary” if the indemnity is paid as a contribution towards their expenses. Yet, the new circular doesn’t provide a precise definition of “contribution towards the expenses” (“défraiement”). In practice, this should mean that only the refund of reasonable travel and accommodation expenses would remain outside the VAT scope.
Management services of an investment fund – Although the new rules don’t tackle this topic, fees paid to directors of investment funds should continue to benefit from the exemption applying to the “management of investment funds”, provided that they relate to management services of a qualifying investment fund. We expect that the services of directors sitting on the board of management companies of contractual funds (FCPs) would be subject to partial tax, with no clear rule yet on how the apportionment should be carried out between the management of the company vs the management of the fund itself.
2. Personal liability of managers/directors and penalties on the rise
The tax reform, being now in full swing, has introduced new VAT measures. Here are the main changes you need to know:
The managers in charge of the taxpayer’s day-to-day management in relation to VAT obligations are bound to a personal and joint liability in case of VAT underpayments or late payments, when they failed in the performance of their duties;
The Director of the Luxembourg VAT Authorities can launch a guarantee call procedure (“appel en garantie”) against these managers;
Authorities have increased fines and penalties and introduced new penalties in case of tax fraud;
The obligation to register rental agreements no longer applies.
3. eCDF replaces the eTVA platform for the electronic filing of VAT forms
As from 1 January 2017, Luxembourg taxpayers will have to file their periodical and annual VAT returns on the eCDF platform.
4. Services connected with “immovable property”
A new EU regulation came into force on 1 January 2017 and applies directly in each EU Member State. It mainly regulates two issues:
an autonomous EU definition of immovable property for the purposes of the application of VAT regulations throughout the European Union, and
a non-exhaustive list of examples of services identified as connected with immovable property (and hence taxable in the country where the property is) as well as those that don’t demonstrate the connection (and where the place of taxation follows the general rule).
This is particularly relevant for real estate promoters, developers, administrators, asset managers and investors. It should help answer various questions linked to the place of supply of specific services and complex agreements, prevent double taxation and in some cases apply an exemption (e.g. when the services are provided to a Luxembourg investment fund).
5. Luxembourg cost-sharing VAT exemption
Last but not least, we expect the European Court of Justice (ECJ) to issue a ruling on the VAT rules applicable to “independent groups of persons” (also referred to as the cost-sharing VAT exemption). If the ECJ confirms that the Luxembourg law and practice that is at stake breaches European rules, Luxembourg will have to change its legislation regarding this specific VAT exemption. As a consequence, companies having implemented this regime will have to analyse the impact of the decision on their business and probably adapt their structure.
What’s next?
While 2017 will keep you busy, the years to come will bring its share of surprises and new challenges including:
EU VAT action plan – the action plan sets out actions to tackle the VAT gap and adapt the VAT system to the digital economy and the needs of Small and Medium sized Enterprises. As part of the VAT action plan, the European Commission has already issued a package of VAT measures to support e-commerce and online businesses in the EU, among which the extension of the Mini One-Stop-Shop to cross-border supplies of goods and the generalisation of the destination principle These new VAT rules will come into force either in 2018 or in 2021.
Vouchers – EU Member States will have to transpose into national laws the VAT treatment of vouchers as of 1 January 2019.
What we think
Frédéric Wersand, VAT Leader
While 2016 was quiet in terms of legislative changes, the tax reform, however, clearly shows the priorities of the government: (i) to extend the means of the authorities to collect VAT, (ii) to make directors and managers become personally liable for the proper handling of the tax files, (iii) to increase fines. We also expect more FAIA requests (the Luxembourg SAF-T files that businesses must provide upon request of the authorities). And watch out for the next EU developments: many of them will have direct impacts on Luxembourg businesses, whether they come from the Commission or the ECJ.
