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New Circular 765-1

New Circular 765-1

Additional precisions as to the determination of input VAT deduction for partial taxpayers


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Reminder: principles issued from Circular 765 of 15 May 2013

In 2013, Circular 765 clarified the method of calculation of input VAT recovery right for taxable persons simultaneously carrying out taxable and exempt economic activities.

This document, while explicitly referring to the case-law of the Court of Justice of the European Union1  (CJEU), provided that Directive 2006/112/EC (VAT Directive) had to be interpreted as allowing the member states to use a more appropriate approach than the one of the general prorata, in order to determine the input VAT deduction of some specific businesses.

In this respect, the Luxembourg VAT authorities explicitly referred to a direct allocation method or a key repartition based on analytical accounting, both reflecting more accurately the use of the goods and services made by a taxable person carrying out a partially exempt economic activity.

As a consequence, the general prorata should not need to be considered if it is clear that the input VAT recovery can be calculated more effectively based on the above mentioned methods.

On 11 June 2018, the Luxembourg VAT authorities published a new document, Circular 765-1, on VAT deduction. This document is aimed at precising the application of the previous circular to the calculation of input VAT deductible for companies having an activity that partially falls outside the scope of VAT.

Let’s have a closer look at the issues involving input VAT deduction for companies having a partial VAT activity, namely holding companies.

Distinction between a passive and active holding and issues arising from this

While determining input VAT deduction right, the case-law of the CJEU makes a distinction between passive and active holding companies. Issues arising from this mainly concern the allocation of overhead costs and to which activity these are related.

In Polysar2, the Court stated that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, does not have the status of a taxable person for VAT purposes. Therefore, the latter has no right to any input VAT recovery on the costs incurred in relation with this acquisition.

On the contrary, as per Luxembourg VAT law, the involvement of a holding company in the management of companies in which it has acquired a shareholding, should constitute an economic activity. The management activities can refer to the supply of administrative, financial or commercial and technical services3.

In the recent Larentia+Minerva case4, the Court further specified the VAT treatment of the following situations that could potentially arise:

In case a holding company is involved in the management of its subsidiaries in a fully active manner, it should be entitled to a VAT deduction on the costs incurred on the acquisitions of the subsidiaries.

In case a company is involved in the management of only a few of the subsidiaries acquired, there should be a distinction between the economic activity of the company (active management) and non-economic activity (passive holding of shares). Only the VAT incurred on the costs related to the economic activity should benefit from the VAT deduction. In addition, the CJEU indicates5  that the qualification of ‘active involvement’ as an economic activity implies a separate remuneration for the services rendered.

Circular 765-1 as an answer to the issues of input VAT deduction for partial taxpayers

Definition of the scope of application

The Luxembourg VAT authorities have clarified the rules applicable in Circular 765 to partial taxpayers.

First, the Circular distinguishes between taxable persons carrying out an economic activity partially exempt for VAT purposes and partial taxable persons carrying out both economic and non-economic activities for VAT purposes. It is to be noted that Circular 765 only referred to the case of taxable persons carrying out an economic activity partially exempt, by establishing more adequate methods to determine the amount of input VAT they were entitled to.

Circular 765-1 clarifies the situation of partial taxpayers who do not have a full input VAT recovery as well, insofar as they carry out at the same time economic and non-economic activities for VAT purposes. The principles applicable in Circular 765 are therefore extended to the latter category of taxable persons, who should from now on allocate part of their costs to their non-economic activity.

Circular 765-1 establishes that, to the extent such persons should qualify as taxable persons, they should be entitled to an input VAT deduction right with regard to their (non-exempt6) economic activity.



In case a holding company would carry out (like in the Securenta case7) an activity falling within the scope of VAT, but which is exempt (i.e. financing to companies established within the EU), a taxable activity (i.e. provision of taxable services) and would in parallel passively holds participations (out of scope of Luxembourg VAT), both Circular 765 and 765-1 should apply.

As a consequence, the VAT incurred on the costs linked to the taxable services should be deductible, while the VAT related to other services (non-economic/exempt activity8) should not. The input VAT recoverable with regard to general overheads should rely on an objective repartition key.

Read together, the aim of these two documents is to apply direct allocation/key allocation methods for both persons carrying out an economic (taxable/exempt) activity and an activity falling outside the scope of VAT.





1 We refer to the case-law mentioned hereafter
2 C-60/90 Polysar
3 C-16/00 Cibo Participations, C-142/99, La Floridienne
4 C-108/14 + C-109/14 Larentia+Minerva mbH &Co KG
5 MVM, C-28/16
6 Non-exempt and not entitling to any input VAT deduction right (i.e. financing within the EU); however the activity of financing outside the EU should entitle to an input VAT deduction right
7 C-437/06 Securenta
8 See footnote 6

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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