VAT corner

Temporary reduction of VAT rates

As part of the measures to combat inflation, the Law of 26 October 2022 provides for a temporary reduction in Luxembourg VAT rates that will be effective from 1 January 2023 to 31 December 2023.

Accordingly, the standard, intermediate and reduced rates will decrease by 1% to reach 16%, 13% and 7% respectively. The super reduced rate of 3% will remain unchanged.

The VAT authorities (Administration de l’Enregistrement et des Domaines) published a circular on 7 December 2022 providing guidelines on the application of these temporary VAT rates.

VAT on directors’ fees : a turning point?

On 26 April 2022, the lower administrative court of Luxembourg (Tribunal administratif) has requested a preliminary ruling from the Court of Justice of the European Union ("CJEU") on the VAT treatment applicable to the director’s fees (tantièmes) received by a (natural person) member of the board of directors of a Luxembourg public limited company (see Case C-288/22).

In particular, the CJEU is asked to answer the following two questions:

1. (i) does a natural person who is a member of the board of directors of a Luxembourg public limited company carry out an "economic" activity within the meaning of Articles 9 and 10 of the VAT Directive and more specifically, are director’s fees received by that person to be regarded as remuneration paid in return for services provided to that company?
2. (ii) does a natural person who is a member of the board of directors of a Luxembourg public limited company carry out his or her activity "independently", within the meaning of Articles 9 and 10 VAT Directive?

It must be noted that following Circular No. 781 of 30 September 2016, the Luxembourg VAT authorities were of the view that the director’s fees received by directors must be regarded as remuneration paid in consideration for a service. As such, directors are considered as carrying out an economic activity that falls within the scope of VAT. In fact, the CJEU ruling is highly expected as it could reverse the current Luxembourg VAT practice.

CJEU Case C-250/21: sub-participation agreements are VAT-exempt credit transactions.

Case C-250/21 deals with a sub-participation agreement pursuant to which a sub-participant must pay an original creditor an upfront amount in return for the latter (which still holds a debt against the principal debtor) to pay to the sub-participant all the proceeds received from the principal debtor. Accordingly, the sub-participation agreement (i) provides liquidity to the original creditor and (ii) shifts the credit risk to the sub-participant for which the sub-participant has no recourse if the principal debtor defaults (either against the principal debtor or the original creditor).

According to the CJEU, any such operation is qualified as a "granting of credits", exempt from VAT under Article 135(1)(b) of the VAT Directive¹ , since it consists essentially in the provision of capital in return for remuneration. The fact that the sub-participant is exposed to potential losses and thus bears the credit risk is inherent in any grant of credit, regardless of whether that risk stems from non-payment by the principal debtor or the original creditor.

It should be noted that the CJEU’s ruling departed from the opinion of the General Advocate who considered that the sub-participation service is made of two indivisible elements of similar importance, i.e. the granting of credit and the risk management. As such, the General Advocate concluded that the operation in its entirety could not benefit from the VAT exemption for the "granting of credit".