Luxembourg introduces VAT grouping regime

Take away:

  • Bill of law: following existing VAT grouping regimes in other EU Member States, the Luxembourg Government has now proposed the adoption of a VAT grouping regime in Luxembourg. The relevant bill of law, still subject to discussions and voting in the Parliament, is expected to enter into force on 31 July 2018.
  • Potential avoidance of VAT leakages: the VAT grouping regime allows companies – including non VAT taxable persons –  sharing financial, economic and organisational links to supply services and goods to one another, without having to apply VAT. This potentially results in the avoidance of VAT leakages.
  • Administrative simplification: members of a VAT group are relieved from their obligation to file VAT returns, as the group itself is considered as a taxable person encompassing its members. It is therefore the group that files VAT returns, as opposed to its members.

The proposal follows recent decisions of the Court of Justice of the European Union, ruling out the use of the Independent Group of Persons (IGP) mechanism for sectors other than those of public interest. The IGP was commonly used in the Luxembourg financial, investment management and insurance sectors.

The now proposed VAT grouping regime should provide an alternative to avoid distortionary VAT leakages and competitive disadvantages with other EU Member States.

The bill relies on Article 11 of the EU VAT Directive, which allows one to “regard as a single taxable person any persons established in the territory of that Member State, who, while legally independent, are closely bound to one another by financial, economic, and organisational links.”

Luxembourg entities sharing financial, economic and organisational links may therefore well be soon entitled to opt for the VAT grouping regime. This regime will entail the following:

  • The group is treated as a single VAT taxable person, and is therefore granted a single VAT number. Members of the group will be granted auxiliary VAT numbers, to be used in their transactions with third parties.
  • Supplies of services and goods within the group are considered as falling outside the scope of VAT. This will allow entities with no input VAT deduction right to avoid a VAT leakage when receiving services from an entity with which it shares financial, economic and organisational links.
  • The group is headed and represented before the VAT Authorities by a single member and VAT returns are to be filed by the group itself only. Members of the VAT group are therefore relieved from their obligation to file VAT returns.
  • Members of the group are jointly liable for VAT, default interests and fines.

Groups having established several Luxembourg entities can already start reviewing their VAT position and the possibility to apply the VAT grouping, potentially allowing them to save non-deductible input VAT.