VAT deduction right of holding companies - New Guidelines published by the VAT authorities

On 11 June 2018, the Luxembourg VAT Authorities published Circular n° 765-1 on the VAT deduction right methodology to be used by holding companies.

This new Circular provides additional guidelines on the VAT deduction right of partial VAT taxable persons, i.e. taxable persons performing both activities within the scope of VAT and activities outside the scope of VAT (e.g. holding of shares).

First step – Circular n°765 of 15 May 2013

A first Circular n°765 was published in 2013 focusing speci cally on the VAT deduction right of mixed VAT taxable persons, i.e. taxable persons performing both VAT taxable and VAT exempt economic activities (e.g. EU financing activities).

In light of that Circular, mixed taxable persons should determine whether input VAT can be deducted based on a direct allocation of their costs to specific revenues or based on specific keys.

The direct allocation method is based on a cost-by-cost analysis in which input VAT incurred in relation to outgoing transactions granting a VAT deduction right should be considered as deductible while input VAT is not deductible when incurred for transactions not granting a VAT deduction right.

The VAT deduction right could also be based on specific keys such as a pro rata calculation based on the number of employees, the square meters allocated to each activity, etc.

Partial VAT taxable persons and Circular n°765

Circular n°765 was exclusively applicable to mixed taxable persons even if no clear distinction appeared in the document. The limited scope of this Circular has been confirmed recently in a judgement1 of the Tribunal d’arrondissement de Luxembourg stating that Circular n° 765 does not apply to partial taxable persons. In accordance with the principles which have emerged from various Court of Justice of the European Union (‘‘CJEU’’) cases, the judgement recalled that the Luxembourg State has not determined any criteria for apportioning input VAT between economic and non-economic activities.

For the record, the Tribunal recognised the allocation method suggested by the company as valid, which was based on the investments carried out through non-EU financing and shareholding activities, in contradiction with the position of the VAT authorities who had denied almost any VAT deduction right.

From darkness to light: the new Circular n°765-1

While Circular n°765 provides guidelines regarding the VAT deduction methodology applicable to companies performing both VAT taxable and VAT exempt activities (e.g. EU financing), Circular n°765-1 clarifies the methodology to be used by companies carrying out both economic activities (VAT taxable or VAT exempt) and non-economic activities (outside the VAT scope – e.g. passive holding of shares).

As from 1 January 2018, the new Circular extends the VAT deduction methodology described as per Circular n°765 to partial VAT taxable persons. The latter have to therefore determine their VAT deduction right by applying the direct allocation method or specific allocation keys.

Action required

It is now the right moment to reassess the VAT deduction methodology used by holding companies in light of this new Circular. Depending on the activities carried out, applying the direct allocation method or specific allocation keys can improve the VAT deduction right of holding companies.

A VAT review of the activity of holding companies performing economic activities as well is therefore strongly recommended in order to determine the most accurate VAT deduction methodology to be used.

1 Atoz acted as VAT technical expert for the company.