LUXEMBOURG - VAT grouping regime
The Law of 6 August 2018 implements the Value Added Tax (VAT) group regime in Luxembourg in accordance with VAT directive 2006/112/EU. The introduction of VAT groupings is a quick reaction to recent Court of Justice of the European Union cases on cost-sharing arrangements.
Legal persons established in Luxembourg that are closely related to each other in financial, economic, and organisational terms can opt to be considered a single taxable person, in other words, a VAT group.
Why a VAT group?
Here are some of the advantages of the VAT group regime:
- It provides Member States with a tool to combat abuse and fraud.
- It simplifies the administrative and compliance burden for both VAT authorities and businesses, since only one consolidated VAT return has to be filed for the VAT group as a whole.
- It increases VAT cash-flow efficiency by crediting the input VAT attributable to particular members of the group against the output VAT of other members.
- It limits the cascading of non-deductible VAT. Supplies between group members are disregarded for VAT purposes. Therefore, no VAT applies on goods or services supplied between VAT group members.
Who does the regime apply to?
To be part of a VAT group, the companies must be:
- Established in Luxembourg - The VAT Group may integrate Luxembourg permanent establishments of foreign companies. It implies that a permanent establishment could be integrated in the VAT group even if it belongs to a foreign company. However, in order to be integrated, the permanent establishment has to be established in Luxembourg and fulfil all the other requirements.
- Closely linked with each other in the following terms:
- Financial: there must be a direct or indirect link of control resulting from their relationship (such as a participation in at least 20% of the capital).
- Economic: the main activities of the group members must be of the same nature or they must complement each other, influence each other, or be in pursuit of a common economic objective. Or, the activity of a given member must be exercised in whole or in a part to meet the needs of the economic activities of the others.
- Organisational: the companies must be directly or indirectly under joint management or under the control of a single person (by law or fact). Or, they must organise their activities in full or partial cooperation with each other.
VAT group representative and compliance matters
The VAT group’s representative is the member that controls the other members or that has the highest turnover or income.
The VAT group is assigned an individual identification number and each member has auxiliary VAT numbers. The representative must send the Luxembourg VAT authorities the declaration of incorporation of the VAT group.
The VAT group must file a common VAT return for the whole group instead of individual returns.
EC Sales Lists (ESL) must be filed by the group if taxable services are rendered to VAT taxable persons established in other EU Member States under the name of each member of the group. The auxiliary VAT number of each group member must be provided on the EC sales list.
Where applicable, VAT invoices (incoming and outgoing) must be issued under the name, address and auxiliary VAT number of the relevant group member. Transactions between group members are treated as transactions made inside the same legal entity and so they are out of scope for VAT purposes.
Right to recover the VAT
The VAT group applies the normal rules for input VAT deductions. The right to recover the VAT applied on supplies of services or goods rendered by suppliers that are outside the VAT group depends of the use made by the VAT group. If the VAT group uses the supplies of goods or services for one of its activities related to producing a VAT taxable supply, the VAT is deductible. If the VAT group uses the supplies of goods or services for an activity not related to producing a VAT taxable supply, VAT is not deductible. For costs that cannot be directly attributed to either type of activity, a special VAT recovery ratio could be computed and if this is not possible, a general prorata split will be computed and applied.
Since the entry into force of the new legislation, many businesses have shown an interest in implementing a VAT group in Luxembourg. Though we expected the regime to be primarily explored by companies active in the financial sector, the banks and operators in the financial industry have seemed hesitant to implement this regime. The main reason for this hesitancy seems to be that many of them are legally set up with a head office/branch structure and are, therefore, potentially impacted by the new legislation’s anti-abuse provision (based on the CJEU’s Skandia case). The retail sector, however, and businesses with a ‘full recovery’ profile have implemented VAT groups to benefit from the cash-flow impact of the regime and because of the benefits of the regime’s simplified VAT compliance obligations.