Consequences of the recent case-law of the Court of Justice of the European Union
The recent case-law1 of the Court of Justice of the European Union (CJEU) made it clear: Luxembourg had to abolish its current legislation on independent groups of persons (IGPs). Indeed, following the Commission against Luxembourg case, the CJEU found that the way Luxembourg had implemented article 132, 1 f) on the VAT exemption of the services supplied by IGPs to their members was contrary to the Directive 2006/112/EC (“VAT Directive”).
Luxembourg had to find alternatives for companies active in the financial and insurance sectors, as, following decisions in the Aviva2 and DNB Banka cases3, the CJEU found that the exemption provided under article 132, 1, f) (article 44, 1, y) of the Luxembourg VAT Law) cannot apply to IGPs active in such sectors anymore. Indeed, the services provided by IGPs to their members must be linked to “public interest” only.
In order to maintain a level playing field with other Member States, the Luxembourgish Government has decided to implement the VAT group regime in its national legislation.
On 23 November 2017, Finance Minister Gramegna stated that the VAT group regime was one of the alternatives to IGPs to be considered. At the end of 2017, the cancellation of Grand Ducal decree of 21 January 2004 and the related circular n°7834 were the direct result of the European case-law. Additionally, M. Gramegna asserted on 5 March 2018 that a draft bill introducing a Luxembourg VAT group regime was in the final stage of preparation. The Government Council approved the new proposed legislation on 16 March 2018 and the draft bill was published last Friday.
The VAT group regime legislation is now intended to come into force on 31 July 20185.
Let’s have a closer look at the main rules related to the VAT group regime as implemented in Luxembourg:
Implementation of article 11 of the Directive 2006/112/EC into Luxembourg legislation
In order to implement the VAT group regime, Luxembourg had to make use of the option included in article 11 of the VAT Directive. It allows Member States 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.” Further, in order to exercise this possibility, Member States “may adopt any measures needed to prevent tax evasion or avoidance.”
On 13 April 2018, Luxembourg introduced Draft bill n°7278 modifying the current Luxembourg VAT law before Parliament.
This draft legislation foresees the insertion of a new section (Section 9, “VAT group regime”) under Chapter VIII, modifying the Luxembourg VAT law.
Consultation of the VAT Committee as a prerequisite to the VAT group
Based on article 11 of the VAT Directive, Member States wishing to make use of this provision have to consult the VAT Committee beforehand.
The Luxembourgish Government has expressed its intention to introduce this regime in its national legislation to the VAT Committee, as this is a procedural requirement which has to be fulfilled before implementing article 11 into the Luxembourg VAT law.
Conditions to form a VAT group in Luxembourg
Based on its current wording, the draft legislation provides that a person shall be considered to be closely bound to the other members by a “financial, economic, and organisational link” if he/she:
These three conditions (referred to as the “link test”) should be seen as cumulative and must be met simultaneously.
As a consequence, insofar as the members are closely bound to one another by a financial, economic, and organisational link, they should be able to form a VAT group. In Luxembourg, if the link test is fulfilled and they opt to form such a group, companies should become members of the group, the main effect of which will be that transactions between members will be disregarded for VAT purposes.
The fulfilment of the listed conditions and the filing of an option result in the creation of a new taxable person (the VAT group).
It is, however, worth noting that, contrary to IGPs, the VAT group legislation should not have any cross-border implications, as this regime is limited to the national territory of Luxembourg.
Which elements of the new VAT group regime should companies pay attention to?
Following the introduction of this new regime in Luxembourg, it is necessary for companies that were formerly members of an IGP to ascertain first the possibility of creating a VAT group.
The VAT group regime may also concern entities that were never members of IGPs.
The importance of the evaluation of the existing flows in Luxembourg will have to be thoroughly examined, in order to determine first the existence of the financial link and then to assess whether the economic and organisational links may or may not exist (i.e. the necessary conditions to form a VAT group).
Following the Skandia case-law, it is advisable to pay attention to the existence of any (foreign) branches of a Luxembourg main establishment wishing to become member of a VAT group. As a clear result of the case-law of the CJEU6, becoming part of a VAT group will imply that transactions between the group and its branch(es) will be considered as occurring between two different taxable persons and follow the standard VAT rules.
Finally, let’s keep in mind that it is not possible for a person to become member of more than one VAT group!
Of course, in doing all these checks, your KPMG Luxembourg VAT team will stay at your disposal for any questions or queries you may have, not only in respect to the assessment of your current structure, but also for the setting up of your own VAT group. You are more than welcome to contact us!
1 Commission européenne contre Grand-Duché du Luxembourg, C-274/15—see our flash alert
2 Aviva C-605/15
3 DNB Banka, C-326/15—see our flash alert
4 Circular n°783, 7 December 2017
5 Answer to Parliamentary Question n°3604 of 6 February 2018 on IGPs
6 Skandia, C-7/13
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