The Luxembourg VAT authorities issued on 19 April 2019 their annual activity report for the year 2018 and it is not surprising to read that…VAT revenues boosted almost 10% compared to the year 2017!

We believe that in the coming years VAT litigation would become a cornerstone of the Luxembourg tax disputes. Why? Mainly due to three factors: VAT is a major source of revenue for the Luxembourg government, the number of companies having a Luxembourg VAT number continues to grow since 2010 and, very important, the VAT authorities are building larger and more specialized teams.

VAT wants to take its proper place within the Luxembourg tax system. Here below we depict three main curiosities that you may not infer at first glance when reading the abovementioned report.

VAT becomes the principal character

In 2017, OECD countries obtained a third of their tax revenue through consumption taxes such as VAT[1]. Indeed, Luxembourg is not a remote island in the "VAT universe".

What is interesting in the Luxembourg case is that, in 2018, VAT revenues grew by circa 7% in the first quarter and 1% in the second quarter…whereas the growth rate rounded 15% in the third and fourth quarters! This gap might be partially explained by additional VAT audits carried out by the VAT authorities further to the implementation of article 80 of the VAT Directive[2] into the Luxembourg VAT Law ("VAT Law").

The above may sound a too simplistic reasoning. However, the report indicates that, by economic sector, the VAT revenues from financial and insurance companies grew by more than 17% in 2018. For those of you who are not VAT specialists, financial companies and insurance undertakings are generally taxpayers with a quite limited input VAT deduction right. These taxpayers are specifically concerned by the law dated 6 August 2018 and the Circular 790 issued by the VAT authorities on 18 January 2019 which aim at avoiding situations where a taxpayer artificially increases its input VAT recovery right or limits the amount of irrecoverable input VAT.

Every VAT has a silver lining

Indeed, it has to be mentioned that the Luxembourg VAT authorities continued to increase the refunds of VAT credits to taxpayers established in Luxembourg in 2018 despite it was not as impressive as in 2017 (3% against 18%). In any case, it demonstrates that the recast of article 55 of the VAT Law few years ago is a useful measure to relieve Luxembourg taxpayers of the economic burden of VAT. Such measure has undoubtedly a positive impact on the Luxembourg economy.

The VAT battle

In 2018, the appeals against decisions of the Luxembourg VAT authorities and case law did not substantially differ compared to the previous year. Nevertheless, the number of cases closed were…more than six times higher!

As indirectly mentioned by the Luxembourg VAT authorities, it simply means an increasing appetite of Luxembourg taxpayers for litigation. This can be justified by the amounts of VAT at stake and/or the "recent"[3] extended joint liability of managers involved in the management of their companies on a daily basis (read alert). They also acknowledged that the arguments developed by the parties become more and more complex.

Our expectations

Based on the above, it is confirmed the increasing importance of VAT amongst the revenues collected by the Luxembourg government. Such role necessarily leads to more VAT audits and thus, more disputes between the Luxembourg VAT authorities and taxpayers.

Our recommendation

In the event the Luxembourg VAT authorities challenge the VAT position of your company, you should not consider you are facing an insurmountable obstacle… but you should neither think it is a piece of cake!

To make a big impression to the VAT inspector(s) it is essential to be compliant with the Luxembourg VAT obligations and have these prepared based on updated tax legislation.

Moreover, it also very useful to keep appropriate supporting documentation of the transactions declared in the VAT returns. Do not be confined to the documents mentioned by article 65 of the VAT Law.

Last but not least, discuss with your VAT expert about the VAT assessment(s) confirmed by the Director of the Luxembourg VAT authorities before bringing civil action.

[1] Sources of Government Revenue in the OECD, 2019 - Elke Asen, Daniel Bunn

[2] The 2006/112/EC Directive of 28 November 2006 on the common system of value added tax

[3] As per the tax reform implemented by the Law of 23 December 2016



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