VAT group law voted by the Luxembourg Parliament
As announced in our newsletter of 16 April 2018, the Luxembourg Parliament has voted on 26 July 2018 on the draft bill n°7278 to introduce the VAT group into Luxembourg legislation. On 27 July, the State Council has given his agreement that the Parliamentary should not proceed to a second vote of the law. This makes the law definitive and close the Parliamentary process. The law enters in force on 31 July 2018. Compared to the draft bill, the voted law does not allow anymore the VAT authorities to exclude some members when their participation to the group may lead to a distortion of concurrence. We could consider this change as favorable for the legal certainty of the regime and have no other change to mention.
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.
Advantage of setting up a VAT group
The main consequence and advantage of a VAT group is to treat all supplies 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—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 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 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 group of persons, which were able to have members in different member states.
It is only possible to be a member of 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 to 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 had 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 and Budget 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 removes a rule that might have been difficult to interpret and apply in practice. It should however be remembered that the VAT authorities would still have the possibility in such situations 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).
7. Specific rules are applicable to invoicing, accounting, and reporting. The group will have the obligation to provide the VAT administration with information regarding transactions between the members, among other duties. Indeed, these transactions are disregarded for VAT purposes and therefore not included in the VAT returns filed by the group.
As a conclusion, it could be said that the introduction of the VAT group is a major step in the Luxembourg VAT law. The advantage and importance of this regime is illustrated by the fact that 17 EU Member States have already implemented this regime in their national law. The decision to opt out of setting up a VAT group is important, which must be envisaged from different angles: VAT, accounting, legal, IT, and more. It is time to reflect on this new opportunity.