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Luxembourg Introduces New VAT Group Regime

Thursday, August 9, 2018

Bill of law no. 7278, providing for the implementation of new value-added tax grouping rules in Luxembourg, entered into force on July 31, 2018. The bill was approved by parliament on July 26.

The new VAT grouping regime is intended to replace the Independent Group of Persons (IGP) regime, which was restricted to only entities engaged in activities in the public interest following rulings from the European Court of Justice.

Article 132(1)(f) of the EU VAT Directive provides an additional exemption for certain activities that are in the public interest. The exemption allows persons who carry on these activities to join together to form a cost-sharing group (CSG) so that they can acquire services and recharge their members for their use of the services at cost without incurring any additional sticking VAT.

A CSG is a separate, independent entity, set up to enable its members to supply themselves with certain qualifying services at cost and exempt from VAT. As a result, a "co-operative self-supply" arrangement is created – a term coined by the EU Commission. Because the CSG is a separate taxable person from its members, it's able to make supplies for VAT purposes to its members. This exemption allows small providers who can't afford to acquire assets on their own account to benefit from the same overall VAT position as larger providers who can afford to purchase the assets themselves. Therefore, the more members of a CSG there are, the greater the potential savings and lower the costs per member of operating the relevant CSG.

Rulings from the European Court of Justice in September 2017 – DNB Banka (Case C-326/15) and Aviva Towarzystwo (Case C 605/15) – precluded those engaged in insurance or financial services from benefiting from the exemption, ruling that these services cannot be said to be in the public interest.

In May 2017, the ECJ had ruled that Luxembourg had transposed in too wide a manner rules in the VAT Directive on services provided by independent groups to their members.

The introduction of the new VAT group regime will therefore benefit those financial services firms who can no longer access the IGP regime.

Article 11 of the EU VAT Directive, enabling the establishment of VAT groups, provides that, "after consulting the advisory committee on value-added tax (the VAT Committee), each member state may 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 organizational links."

EU law provisions on VAT grouping are intended to provide member states a tool to combat abuse and fraud and to provide administrative simplification to taxable persons. Next to that, the joint and several liability of the members of the VAT group better ensures revenue collection. Supplies between group members are disregarded for VAT purposes, and only one tax return is filed and a representative of the VAT group is appointed to be a single point of contact with the tax agency.