overview of the 2018 vat changes in luxembourg

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Overview of the 2018 VAT changes in Luxembourg

October 2018

Input newsletter

The introduction of the VAT group regime by the law of 6 August 2018 is certainly the most important VAT change of the year. However, this should not hide other changes that are also of importance for economic operators of different sectors. After a reminder of our VAT alert of April and July, we examine hereafter these different changes.

These changes are:

A.   Implementation of the VAT group regime 

B.   Introduction of the open market value for transactions between closely linked persons

C.   New rules applicable to services that have characteristics similar to capital goods

D.   New rules applicable to vouchers

E.   Simplification measures for online services

F.   Exemption for services to collective insurance funds

G.   Retention of goods after the cessation of a business

H.   Circular 765-1 – VAT deduction right of partial taxpayers

I.   Circular 787 – Exemption for virtual currencies

J.   Modification of the name of the VAT authorities

 

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A.   Implementation of the VAT group regime

As explained in our previous newsletters issued on 16 April and 27 July 2018, the introduction of the VAT group is justified by the jurisprudence of the Court of Justice of the European Union, which decided on 21 September 2017 that the benefit of the exemption for services rendered by an independent group of persons must be restricted to activities in the public interest. This was a major change for the financial industry, which has implemented a large number of independent groups of persons in order to share resources without incurring additional VAT cost. Luxembourg will be the 18th EU Member State out of 28 to introduce this VAT regime. The wide spread of this regime illustrates its advantages and importance.

The law of 6 August 2018 (Mémorial A n°671 of 10 August) entered in force as of 31 July 2018. Rules applicable to the VAT group are included in the new article 60 ter of the VAT law.


Advantage of setting up a VAT group

The main consequence and advantage of a VAT group is to treat all supply of goods or services between the members of the group as “out of scope” transactions. The internal transactions are thus not subject to VAT. The scope of the VAT group regime is therefore broader than the one of the independent group of persons, which was limited to “support” services (IT, accounting, etc.) to members who could not or only partly recover VAT.
This absence of VAT is favorable for taxpayers who cannot or only partly recover the VAT on their costs: asset managers, banks, insurance companies, management companies of funds, etc., but this regime is not limited to the financial sector and is open to all industries. Effectively, for taxpayers who can fully recover VAT on their costs (e.g., industrial, services, trading activities), the VAT group could also be interesting because it avoids the pre-financing of the VAT on the transactions between the members.


Conditions to set up a VAT group

In principle, any legally independent person is considered a separate taxpayer. However, persons closely bound by financial, economic, and organizational links could opt to be considered as one single taxpayer. It is important to emphasize that these three categories of links must be simultaneously met.

Passive holding companies (i.e., companies that own shares in other companies without intervening directly or indirectly in their management, with the exception of the exercise of the shareholders rights) could be members of a VAT group. This is an interesting feature for the numerous private equity, real estate, and international holding structures existing in Luxembourg.

It is also important to note that the setting up of a VAT group is an option to be exercised or not by the taxpayers.

Only persons established in Luxembourg may be a member of a VAT group. This includes the Luxembourg branches of foreign companies. This is a major difference with the independent groups of persons that were able to have members in different member states.

It is possible to be a member of only one Luxembourg VAT group.

Financial links are defined by reference to article 1711-1, §1, 1, points 1, 2, and 3 of the Luxembourg corporate law, which states the obligation for a company to include undertakings in its consolidated accounting in which the company:

  1. has a majority of the shareholders’ or members’ voting rights in another undertaking; or 
  2. has the right to appoint or remove a majority of the members of the administrative, management, or supervisory body of another undertaking and is at that time a shareholder in or a member of that undertaking; or 
  3. is a shareholder in or a member of an undertaking, and control alone, pursuant to an agreement with other shareholders in or members of that undertaking, a majority of shareholders’ or member’s voting rights in that undertaking.

This includes any company or undertaking where a common shareholder directly or indirectly owns 50 percent of the voting rights. This also includes companies or undertakings where this threshold is not reached but where a “de facto” control exists.

An auditor or chartered accountant must certify the existence of these financial links when the group is set up and registers for VAT. This certificate must be renewed every year. 

Economic links exist when the activities of the companies are of the same nature, the activities of the companies are complementary or are combined for the achievement of a common economic objective, or when the activities of a member are fully or partly performed for the benefit of the other members.

Organizational links exist when the members of a group are under a common management or organize their activities partly or fully in common, or are under the direct or indirect control of the same person. The management or the control might be legal or “de facto.”

An “opt-out” option is available for persons closely linked when they are not interposed in the economic flow between two members of the group and if their non-affiliation to the group does not imply a VAT saving.

Compared to the draft bill, the voted law no longer allows the VAT authorities to exclude some members when their participation in the group may lead to a distortion of concurrence. More precisely, the draft bill included a specific rule for companies that are members of the group despite the fact that they are not usually integrated in a similar economic organization and are not part of the “core business.” The “exposé des motifs” of the draft bill gave the case of insurance companies that own garages as an example. Should this situation have led to a distortion of concurrence, it was foreseen that the members would have been excluded from the group except if they would also performed activities that do not lead to distortion of concurrence. In this case, the supplies of goods or services to the group would have been subject to VAT. This change results from the advice of the State Council of 3 July 2018 and a modification of the draft bill by the Finance Commission of the Parliament on 17 July 2018. It is the only change between the draft bill and the voted law. We could consider this change as favorable for the legal certainty of the regime because it takes a rule out of the law that might have been difficult to interpret and apply in practice. It should however be remembered that in such situations the VAT authorities would still have the possibility to invoke the principle of abuse of rights that is of general application in the VAT law even when no precise text foresees it.


Organization of the VAT group

The main features of the organization of the VAT group could be summarized as follows:

  1. The VAT group must apply for a VAT identification number. At that time, the VAT group should provide a file containing different information regarding its members, activities, and organization. This VAT number will be used in the relationships between the VAT group and the VAT authorities. The VAT group will file the VAT returns of the group under this VAT number. The VAT returns will consolidate all transactions with third parties. 
  2. VAT numbers that exist before the setting up of the group remains active as “auxiliary” VAT numbers of the group and will be used for relationships with third parties. Members no longer must file individual returns. 
  3. A member is designated as the representative of the group with the VAT authorities. 
  4. For groups active in the financial industry that could only partly recover VAT on their costs, the VAT deduction will be based on the principle of the direct link between the purchases and the turnover. It will thus be necessary, based on the analytical accounting, to trace the costs and the income. The VAT on costs that could be traced with turnover opening the right to recover input VAT will thus be fully deductible, while the VAT on costs that are used for turnover not opening the right to recover will be fully unrecoverable. Even if not expressly mentioned, the VAT on general costs that could not be allocated to one or the other activity should be deductible based on the general turnover prorate (prorate between turnover opening the right to recover VAT/total turnover). 
  5. Each member is jointly liable toward the VAT authorities of the VAT due by the group. 
  6. Members should stay in the group at least two calendar years except if the links ceases to exist (e.g. in the case a company is sold).
B.   Introduction of the open market value for transactions between closely linked persons

The VAT group law also introduces the concept of open market value for transactions between closely linked parties (article 28 §3 of the Luxembourg VAT law). Indeed, Luxembourg has decided to introduce article 80 of the VAT Directive in its national law that allows Member States to apply the open market value on transactions between closely linked persons. It is worth mentioning that, before Luxembourg, 24 EU Members have already implemented these rules in their national laws.

The links are defined broadly and include close personal ties, management, ownership, membership, financial or legal ties including a relationship between an employer and employee or the employee’s family, or any other closely connected persons.

This rule could be applied in the three following situations:

a) The consideration agreed by the parties is lower than the open market value and the recipient of the supply does not have a full VAT deduction right

For example, an IT service company provides services to a closely linked insurance company (who cannot recover VAT) for a low consideration to decrease the unrecoverable VAT for the insurance company.

b) The consideration agreed by the parties is lower than the open market value and the supplier does not have a full VAT deduction right and the supply is VAT exempt

For example, a real estate property company rents a property with VAT to a closely linked IT company (who can recover VAT) and another property without VAT to a closely linked insurance company (who cannot recover VAT). The real estate company reduces the price of the rent to the insurance company. This decreases the denominator of its general prorate and thus increase its VAT deduction right.

c) The consideration agreed by the parties is higher than the open market value and the supplier does not have a full VAT deduction right.

For example, a real estate property company rents a property with VAT to a closely linked IT company (who can recover VAT) and another property without VAT to a closely linked insurance company (who cannot recover VAT). It increases the price of the rent to the closely linked IT company. This increases the numerator of its general prorate and thus increase its VAT deduction right.

The open market value is defined by reference to article 72 of the VAT Directive (article 32 of the Luxembourg VAT law). It is the full amount that, in order to obtain the goods or the services in question at that time, a customer at the same marketing stage at which the supply of goods or services takes place would have to pay, under conditions of fair competition, to a supplier at arm’s length within the territory of the Member State in which the supply is subject to tax. When no comparable supply of goods or services could be ascertained, the open market value is, on the one hand, the purchase price of a comparable good or the costs price of a comparable good and, on the other hand, the full cost of the person providing the service.

The VAT authorities will thus have the possibility, when the above mentioned conditions are met, to substitute the open market value to the price agreed by the parties and to claim the VAT computed on this value.

Being part of the VAT group law, these measures entered in force as of 31 July 2018.


C.   New rules applicable to services that have characteristics similar to capital goods

The VAT group law implements article 190 of the VAT Directive in article 53 §2, 1 of the Luxembourg VAT law, which allows Member States to consider those services that have characteristics similar to those normally attributed to capital goods as capital goods, i.e. goods that a taxable person uses over a certain period. It is worth mentioning that, before Luxembourg, 20 Member States have already exercised this option.

These services will thus be subject to the rules regarding the adjustment of deductions in the same manner as tangible capital goods, i.e., during five years from the first January of the year of acquisition. These rules imply to compare the VAT deduction right of the year of acquisition and the right of deduction of each year during the adjustment period. In case of change of the right of deduction, an adjustment in favor of the taxpayer or of the VAT authorities must be made. Services captured by these new rules are, for example, intellectual property (patent) or software.

This new rule will affect taxable persons, which cannot fully recover VAT on their costs such as banks, insurance companies, real estate companies, management companies of investment funds, etc.

Being part of the VAT group law, these measures entered in force on 31 July 2018.


D.   New rules applicable to vouchers

Luxembourg has transposed the EC Directive 2016/1065 of 27 June 2016 in its national law regarding the VAT treatment of vouchers (law of 27 February 2018, Mémorial A N° 149 of 28 February 2018). The new rules are applicable to vouchers issued from 1 January 2019.

a) Definition of vouchers

A voucher is defined as an instrument where

i. there is an obligation to accept it as payment or part of the payment for a supply of goods or services and
ii. the goods or services to be supplied or the identities of their potential suppliers are indicated on the voucher or in related documentation such as the terms and conditions of use such instruments.

These vouchers could be under paper or electronic form and include prepaid telecom cards or gift
Cards for example, but not a price reduction coupon.

b) Distinction between “single purpose” and “multiple purpose” voucher

The VAT treatment of the vouchers differ depending on whether they qualified as “single purpose” or “multiple voucher.”

Single purpose voucher

A single purpose voucher is defined as a voucher where the place of supply of the goods or services to which the voucher relates and the VAT due on those goods are known at the time of issue of the voucher.

Each transfer of a single purpose voucher is treated as the transfer of the goods or the services to which the voucher relates subject to VAT.

Multi-purpose voucher

A multi-purpose voucher is defined negatively, i.e., any voucher other than a single-purpose voucher. Contrary to the single-purpose voucher, VAT will be due only when and if the multi-purpose voucher is exercised. Preceding transfers of the multi-purpose voucher are treated as outside the scope of VAT.

The taxable basis of the supply of goods or services provided in respect of a multi-purpose voucher is equal to the price paid for this voucher, or if this information is unknown, the monetary value indicated on the voucher or in the related documentation, less the VAT relating to the goods or services supplied.


E.   Simplification measures for online services

Simplification measures foreseen by the Council Directive (EU) 2017/2455 and the Council implementing regulation N° 4127/17 will be introduced in 2019 for telecommunication services, television, and broadcasting and electronically supplied services (“online services”) rendered to non-taxable persons established or domiciled in another member state than the one of the provider. These services are taxable in the Member State of the customer and the supplier must apply the VAT of the Member State where his client resides.

The law foresees presumptions helping businesses to determine the localization of the customer. Businesses should obtain, under certain circumstances, two items of non–contradictory evidence of the place where their customer is established or has their permanent address or usually resides.

However, for small and medium enterprises, it is foreseen that as of 1 January 2019, one piece of evidence will be enough.

These pieces of evidence are:

  • the billing address of the customer
  • the internet protocol (IP) address of the device used by the customer or any method of geolocation
  • bank details such as the location of the bank account used for payment or the billing address of the customer held by that bank
  • the Mobile Country Code (MCC) of the International Mobile Subscriber Identity (MMSI)
  • the location of the customer’s fixed landline through which the service is supplied to him
  • other commercially relevant information

This simplification measure will be available for businesses performing less than €100,000 (or equivalent in national currency), excluding VAT, of these type of services in the current and preceding calendar year. Should this threshold be exceeded during the year, the simplification measure will cease to apply as of that time and until the sales fulfill this condition.

Another measure is the introduction of a simplification regime, foreseen for startups and small enterprises. Below €10,000 in yearly cross-border online services, a business will be able to continue applying the VAT of its home member state. These businesses can however opt to have their sales taxed in the Member State of their customers. This option would be of interest should the VAT rate in the Member State of the customer be lower.

Finally, all undertakings providing online services will no longer be obliged to apply the invoicing rules of the Member States where there clients are residents and will be able to rely on the Luxembourg invoicing rules.

It is worth mentioning that more substantial changes regarding rules applicable to online services will be introduced on 1 January 2021.


F.   Exemption for services to collective insurance funds

From 1 January 2018, the exemption applicable to services of management of investments is extended to collective insurance funds under the supervision of the Luxembourg insurance regulator and similar EU funds subject to a similar supervision.

G.   Retention of goods after the cessation of a business

Article 13 of the VAT law has been modified to make the retention of goods subject to VAT after the cessation of a business by a taxable person or his successor when the VAT has been fully or partly deducted. This rule has been applicable since 1 March 2018.


H.   Circular 765-1 – VAT deduction right of partial taxpayers

The Luxembourg VAT authorities have issued a Circular on 11 June 2018 regarding the VAT deduction of “partial” taxpayers. “Partial” taxpayers are those who have an economic activity in the scope of VAT such as trading, industrial, financial, services ones and additionally have a non-economic activity that is not in scope of VAT, such as the “passive” ownership of shares in other companies. The ownership of shares is “passive” when there is no direct or indirect intervention in the management of the companies in which shares are owned, with the exception of the exercise of the shareholders rights. The “passive” ownership of shares is not an economic activity for VAT and does not allow the deduction of VAT on costs. On the contrary, if a holding company also performs activities such as charging management services (Larentia + Minerva and Marenave Schiffahrt, C 108/14 and C 109/14, 16 July 2015), granting credits (Empresa de Desenvolvimento Mineiro SGPS SA (EDM), C-77/01, 29 April 2004) or renting premises (Marle Participations SARL, C-320/17, 5 July 2018) to the companies in which shares are owned, it is possible that a VAT deduction right might be, under some limits and conditions, recognized to this holding company.

The Circular reminds us that the first deduction method to be used by “partial” taxpayers is the real utilization method followed by the special prorate and general prorate methods. Under the real utilization method, VAT will be fully recoverable or unrecoverable whether costs could be allocated to an activity opening the right to recover VAT (e.g. trading activities) or not (e.g. “passive” ownership of shares).

The Circular is applicable as of tax year 2018.

This Circular echoes Circular 765 of 15 May 2013 addressed to “mixed” taxpayers, i.e., those who, on the one hand, perform activities in scope of VAT and opening the right to recover VAT (e.g. trading, industrial, services activities) and, on the other hand, perform activities in scope of VAT not opening the right to recover VAT (e.g. financial activities) and reminding them of the principles mentioned above.


I.   Circular 787 – Exemption for virtual currencies

In the Circular 787, also issued on 11 June 2018, the Luxembourg VAT authorities remind that the VAT exemption of article 44 §1, c), 7th dash of the Luxembourg VAT law is applicable to both “traditional” and “virtual” currencies such as bitcoin, in line with the decision of the Court of Justice of the European Union in the case “Hedqvist” (David Hedqvist, C-264/14, 22 October 2015).


J.   Modification of the name of the VAT administration

As from 25 August 2018, the name of the VAT authorities has been modified from “administration de l’enregistrement et des domaines” (“land and registration administration”) to “administration de l’enregistrement des domaines et de la TVA” (“land, registration and VAT administration”).

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