On 13 April 2018, a draft bill proposing the introduction of a VAT group in the Luxembourg VAT legislation was submitted to the Luxembourg Parliament.
The proposal to introduce a VAT group in the Luxembourg legislation is a consequence of recent case law from the European Court of Justice that decided in the second half of 2017 that the VAT exemption applicable to services provided by independent groups of persons should be restricted to activities in the public interest. Since financial and insurance groups were commonly relying on that VAT exemption to mitigate their VAT costs, an alternative had to be presented in order to preserve the competitiveness of the financial and insurance sectors, compared to other EU member states that have notably introduced a VAT group regime in their VAT legislation.
Within the VAT group, transactions between members fall outside the scope of VAT, as they are considered as being rendered between a same legal entity.
While members of a VAT group entitled to a full input VAT recovery might benefit from this regime, by avoiding a pre-financing of the VAT with respect to operations between them, the VAT group is essentially interesting for entities having a non or partial input VAT recovery right. Since transactions between members of a VAT group are disregarded for VAT purposes, the regime entitles members of the group to receive services from others, without suffering a VAT cost.
The VAT group is an option granted to taxable persons that can freely decide whether or not to apply for it.
The benefit of a VAT group is subject to certain conditions, among which:
- Only persons established within the country (including local branches of a foreign entities) are entitled to be part of a VAT group. This condition constitutes a significant change, compared to the independent groups of persons, which might be formed with members residing in other member states.
- To be part of a same VAT group, their members must be closely linked from financial, economic and organizational angles, all being cumulative. The existence of financial links has to be certified by an auditor or chartered accountant on an annual basis.
From a practical perspective, the application for the VAT group is subject to certain formalities:
- The group would need to elect a representative, who will file a request with the Luxembourg VAT authorities. The file must contain a set of information, in order to enable the VAT authorities to assess whether the conditions for the VAT group are met. The VAT authorities would then issue a VAT number to the VAT group. This number would be solely used for the relations of the VAT group with the Luxembourg VAT authorities and notably for the purpose of filing the VAT return due by the VAT group. With respect to the relations between members of the VAT group and third parties, an 'auxiliary' VAT number to be allocated to each member of the VAT group would have to be used.
- The VAT group regime would apply as from the first day of the month following the filing of the request, to the extent the request is sent during the first half of the month. If filed during the second half of a month, the VAT group regime would apply as from the first day of the second month that follows.
- Once formed, the VAT group would need to be maintained, in principle, for a minimum period of 2 years.
- There would be a joint liability between the members towards the VAT authorities for any VAT due by the VAT group.
- The VAT group would need to attach to its annual VAT return a detail of all the transactions performed by its members, for the benefit of other members.
- The VAT group will be dissolved once it has only one member remaining.
- A person cannot be part of two different VAT groups.
It has to be noted that the Draft bill foresees that the VAT group would enter into force as from 31 July 2018. The application of the VAT group regime is, however, subordinated to the prior consultation of the EU VAT Committee, which might delay the entry into force of the regime.