Latest changes to Luxembourg VAT law

(a) New VAT group regime

Background

The introduction of a new section 9 regarding VAT groups arises from decisions of the Court of Justice of the European Union (CJEU), in particular,the case law of 21 September 2017 in the matters of Minister Finansów v. Aviva Towarzystwo Ubezpieczeń na Życie S. A . w Warszawie (C-605/ 15), DNB Banka AS v. Valsts ieņēmumu dienests (C-326/15) and European Commission v. Federal Republic of Germany (C-616/15) and the case law of 04 May 2017 in the matter of European Commission v. Grand Duchy of Luxembourg (C-274/15).

The issue of concern was whether the VAT group regime in certain EU jurisdictions was contrary to Article 132 of the Council Directive of 28 November 2006 on the common system of VAT (2006/112/EC) (the Directive), including the exemption regime for services rendered within an independent group of persons (Groupement autonome de personnes) in Luxembourg.

Consequently, the Law narrows down the scope of the relevant VAT exemption so it applies only when the members of a VAT group act for a "general interest" as specified in Article 132 of the Directive.

The introduction of a VAT group was needed as an alternative for tax payers to avoid an unfavourable outcome due to the restriction imposed by the CJEU.

With the new VAT group regime, Luxembourg adopts a similar “playing field” in the VAT treatment of intragroup services when compared with other European jurisdictions.

The main characteristics of a VAT Group

Under the Law:

• A VAT group is defined as a single taxpayer composed by different legal persons, closely related by financial, economic and organisational links (see Conditions for the creation of a VAT group below).

• A VAT group is a fiscal fiction - the group has no legal personality and does not exist from a corporate law perspective. Each member loses its own fiscal personality for VAT purposes to the benefit of a common one. This means that any tax liabilities in relation to all members are put together for VAT purposes, in particular, for the regularisation of the input VAT taxable base for operations undertaken by such member prior to the date it becomes a member.

When a member withdraws from the VAT group it recovers all rights and obligations in relation to such regularisation.

• All members of the VAT group must be established in Luxembourg. No intra-European group allowed.

• A person can only be member of one VAT group.

• The VAT group is identified by a VAT number attributed to such group to be used in relation to the Luxembourg VAT administration, Administration de l’enregistrement et des domaines, (LTA). VAT auxiliary numbers are provided to each member and these should be used in relation to third contractors.

• One member of the VAT group acts as representative for the whole group - this is generally, the member with control over the others. (Another member can act as representative if justification for this decision is provided to the LTA.) The lead member will declare the constitution of the VAT group to the LTA by presenting certain required documents. This is subject to the member:
  • Being the most capable of ensuring the fulfillment of the conditions of the VAT regime
  • Allowing access to all relevant information, and
  • Possessing all required resources to ensure compliance in a continuous manner.
• Each member of the group is jointly liable to the LTA for the VAT liability, relevant interest, penalties and expenses in relation to the period where they integrate the VAT group.

• The formation of a VAT group is optional. However, if formed, all members must meet the relevant requirements must be part of the VAT group.

• Once created, the members must stay within the VAT group for at least two calendar years.

• Invoicing of operations of the VAT group member is to be operated under the name of the member which is at its origin and under the auxiliary VAT identification number attributed for the member.

Conditions for the creation of a VAT Group

Three cumulative conditions must be met to create a VAT group. Namely the VAT group members must have: financial links, economic links and organisational links. To be considered as "closely related persons": 

What is the main impact for Luxembourg taxpayers?

The main advantage of a VAT group is that it treats all supply of goods or services within the members of the group as “out of scope” transactions for the VAT tax purpose.

The group’s input VAT is deductible according to the usual rules.

Members of the group can present a consolidated VAT return.

(b) Rules concerning transactions between linked parties

The introduction of a new paragraph 3 at Article 28 of the Law of 12 February 1979 on VAT, as amended, is to establish a framework on the determination of the taxable base in some cases.

Background

The introduction of the paragraph is based on Article 80 of the Directive.

In VAT matters, unless specific exceptions apply, the taxable base is, the agreed price between the parties. The new paragraph aims to clarify the taxable base regarding operations made between closely related persons (as described above). Such operations are often made in exchange for a considerably different remuneration from that obtained in relation with third parties. The objective of the new rule is to neutralise such cases.

"Close links" between the parties are defined broadly. For instance, these can be family links, or other close personal links, organisational links, ownership, affiliation, financial or judicial links concerning the established relationship between an employer and an employee, employee’s family or other persons who are close to him.

New rule

The new paragraph will bite in three areas:

• when the counterpart is lower than the ‘normal value’ and the party receiving the goods or services cannot deduct the full amount of VAT in light of the relevant VAT rules
• when the counterpart is lower than the ‘normal value’ and the party selling the goods or supplying services cannot deduct the full amount of VAT in light of the relevant VAT rules and the such sale of supply is VAT exempt, and
• when the counterpart is higher than ‘normal value’ and party selling the goods or supplying services cannot deduct the full amount of VAT in light of the relevant VAT rules.

Under the rules (which still apply) prior to this change, the "normal value" of a good or a service is defined as the total amount a purchaser or recipient, in a commercial context, to whom goods are delivered or services supplied, would pay on an "at arm’s length basis" to an independent party within the country.

When the "normal value" cannot be established, the "normal value" of a good is the acquisition value for comparable goods, or in its absence, its resale price.

For a service, the "normal value" cannot be lower than expenses incurred by the supplier of the service to supply such service.

How does this regime impact Luxembourg taxpayers?

This change should allow the LTA to claim back VAT on the normal value of a good or service instead of the agreed price between the parties when they are "closely linked".

One example would be a holding company which receives administrative services from a company controlled by the same shareholders either free of charge or at a price significantly below market value.

For more information in this respect and to assess what this entails, please contact any member of the Luxembourg tax team.