Decision of the Court of Cassation on the deductibility of VAT incurred on general expenses

In a recent decision, the Luxembourg Supreme Court (Cour de cassation) rejected an appeal (pourvoi en cassation) lodged by Luxembourg VAT authorities (Administration de l’enregistrement, des domaines et de la TVA, “AEDT”) against a decision of the Court of Appeal (Cour d’appel).

The case involved a group of companies active in the real estate sector. Among the group companies, a Luxembourg company (“LuxCo”) was performing activities both within and outside the scope of VAT. In the course of its activities, LuxCo acquired services from an associated company established in France. These services were invoiced as a whole to LuxCo. Since it was not possible to identify any direct link between the acquired services and a specific activity of LuxCo, said services were treated/classified as general expenses incurred by LuxCo. Luxembourg VAT was applied on the services rendered by the French company under the reverse charge system .Following the acquisition of the services, LuxCo re-invoiced them to other companies of the group. As there was a large disproportion between the self-assessed input VAT and the output VAT collected, LuxCo claimed a refund of the excess input VAT.

As regards the deductibility of VAT paid on general expenses, while the AEDT did not contest that VAT on general expenses is in principle deductible, the deductibility of VAT paid on general expenses is, according to the AEDT, only possible to the extent that the general expenses are actually fully incorporated in the price of the output transactions. In the case at hand, as the value of the services acquired exceeded the value of the services re-invoiced, the total amount of the general expenses was considered by the authorities as not incorporated in the price of the output operations. As a result, the AEDT limited the deductibility of the input VAT paid to the VAT paid on the costs actually re-invoiced.

In its judgment, the Court of Appeal recalled the case law of the Court of Justice of the European Union according to which the general expenses are presumed to relate directly and immediately to the economic activity carried out by a VAT taxable person, falling within the scope of VAT. Furthermore, it recalled that the economic result realised by the VAT taxable person is not a condition for deductibility and that deductibility must even exist if the economic activity for which the costs were incurred is never realised. Finally, the Court of Appeal refers to an expert opinion on the link between input costs and output revenues produced by LuxCo to reject the arguments of the AEDT. In the appeal in cassation, the Court of Cassation confirms the judgment of the Court of Appeal, which gave sufficient reasons for its decision, and rejects any request for a preliminary ruling to the CJEU.