On 26 July 2018, the Luxembourg Parliament voted into law Bill No. 7278 (the “Bill“) introducing a special VAT regime in Luxembourg, the “VAT group regime” which is now enshrined in Article 60ter, paragraph 1, of the Luxembourg Law on the Value Added Tax (the “VATL“). No notable amendments were made to the Bill, thus the majority of the Bill’s provisions were adopted.
- Context and Origin of the VAT Group Regime
The Bill’s main purpose was to implement a VAT consolidation regime.
Prior to the introduction of the VAT group regime, there existed a regime that exonerated autonomous groups of persons in Luxembourg.
However, the scope of application of the above-mentioned mechanism was significantly reduced by jurisprudence of the Court of Justice of the European Union (the “CJEU“) through a series of judgments of 4 May 2017 and 21 September 2017.
Luxembourg’s reaction was expected with the introduction of the VAT group regime.
Additionally, given that 16 EU Member States had already adopted the VAT group regime pursuant to Article 11 of Directive 2006/112/EC in various forms, Luxembourg needed to adopt an equivalent regime to avoid lagging behind its competitors.
- Advantages of the VAT Group Regime
The main attraction of the VAT group regime is the fact that persons established inside the country and closely linked to each other financially, economically and organizationally may opt to be considered as a single taxable person, a VAT group.
Moreover, transactions effectuated among members of a VAT group are assimilated to transactions carried out by a single taxable person.
Given that these transactions, characterized as internal, are not within the VAT’s scope of application, they cannot be subject to the VAT.
This represents an undeniable advantage for taxable persons who cannot deduct, or who can only partially deduct, the input VAT borne by the costs. That is the case with banks, insurance companies and investment funds.
Beyond the financial sector, the attraction of such a regime remains high because it frees taxable persons from the obligation to pre-finance VAT costs in intragroup transactions.
- Main Requirements to benefit from the VAT Group Regime
Under paragraph 1 of the VATL’s Article 60ter, “persons established inside the country and closely linked to each other financially, economically and organizationally may opt to be considered as a single taxable person”.
Under CJEU jurisprudence, the notion of “person” refers to both taxable persons and non-taxable persons. It also includes legal persons and entities without legal personality.
The VAT group regime is limited to persons located in Luxembourg. Consequently, a cross-border VAT group is not possible.
Companies are deemed financially linked as soon as there is a direct or indirect link with respect to the control of the corporate capital. In practice, that means any company that:
- has a majority of another company’s shareholder or member voting rights;
- has the right to appoint or revoke a majority of the members of another company’s administrative, management or supervisory body, and is at the same time a shareholder or member of that company; or
- is a shareholder or member of another company and, by virtue of an agreement with the other shareholders or members of that company, alone controls a majority of its shareholders’ or members’ rights to vote.
According to the Bill’s explanatory comments, the economic link
[ … ] is defined as a function of the existence of at least one of the three forms of economic cooperation listed hereafter. The main activity of the members of the group is the same, or the activities of the members of the group are complementary or interdependent, or one of the members of the group carries out activities that entirely or substantially benefit the other members.
With respect to organizational integration, this also includes, apart from management coordinated among several persons, management concentrated in the hands of one or several persons.
Satisfaction of the above requirements is certified by an accredited auditor (réviseur d’entreprises) or by a certified public accountant (expert-comptable), both of whom must be certified and authorized to practice their professions under the currently applicable legislation.
The certifications must be renewed annually and sent to Luxembourg VAT authority (Administration de l’Enregistrement et des Domaines et de la TVA or “AEDT“) when filing the annual VAT return.
A VAT group must file VAT returns consolidated for the group. However, in case of intra-Community transactions, the recapitulative statements (états récapitulatifs) must be filed separately in the name of and under the auxiliary VAT identification number of each individual member.
The VAT group is responsible for transmitting, as an attachment to the annual VAT declaration to be filed, the total amount of transactions realized by each one of the members to the benefit of each of the other VAT group members.
The VAT group members are jointly liable for the VAT, late payment interest (intérêts moratoires), as well as tax fines and expenses due under the transactions associated with the period during which the persons are part of the VAT group.
- VAT Group Operation
Given that it is an optional regime, a VAT group is formed by a declaration of VAT group formation signed by the VAT group’s representative before the AEDT. It is thus necessary to appoint a representative from among the members of the group.
The complete and duly documented declaration becomes effective on the first day of the month following the fifteen-day period beginning on the date of the AEDT’s receipt of that declaration.
The declaration of formation is deemed a declaration of cessation of activity for the members who, on the date of their entry into the VAT group, were already identified to the AEDT.
A VAT group will then be given a VAT identification number to be used in filing VAT returns and, for each member of the group, an auxiliary VAT identification number will be issued to be used for its own transactions.
The VAT group representative must file a declaration for the incorporation of an eligible person wishing to join the VAT group. For persons who no longer fulfill the requirements to be a member thereof or who, while fulfilling the requirements, no longer wish to be a member, the representative must file a declaration of withdrawal of that person from the VAT group.
The declarations must be filed by the usual deadlines used by all taxable persons for the declaration of commencement, change or cessation of their economic activity.
A person may only be a member of a single VAT group.
Participation in a VAT group must be for at least two calendar years.
A VAT group is dissolved on the date when, based on a declaration of withdrawal of one or several members, only one member remains.
- VAT Group Regime’s Entry into Force
The VAT group regime entered into force on 31 July 2018.