Luxembourg VAT group implemented – First impressions

The Law dated 6 August 2018 has implemented the VAT group in Luxembourg as of 31 July 2018. A dedicated section of the Luxembourg VAT Law describes the conditions to be observed, as well as the procedure to follow in order to benefit from this optional VAT regime.

In a nutshell, the Luxembourg VAT group aims at mitigating the input VAT leakage suffered by taxpayers having a limited input VAT recovery. It is specifically recommended for Luxembourg financial players (such as banks and insurance companies) that have Luxembourg companies and/or branches closely connected by financial, economic and organisational ties and share support resources, such as accounting, HR or IT services.

From that perspective, it seems that the VAT group is the panacea for some major players of Luxembourg's financial hub. However, it is important to note that this new optional regime requires the fulfilment of administrative obligations (for instance, the appointment of a group representative, the reporting of transactions between group members to the VAT authorities) and should be maintained for at least two calendar years. Moreover, the VAT group may turn out to be inefficient or even lead to adverse VAT impacts, depending on the transaction flows between the Luxembourg head office/branch and foreign branch(es)/head office.

The above downsides are very likely the reasons why the new VAT group is not as successful as expected. Based on the feedback collected from banks and insurance groups established in Luxembourg, it seems that the VAT group does not constitute one of their priorities. The introduction of more flexible measures (which will not be coming soon due to the Luxembourg general election on 14 October 2018) would increase the popularity of the Luxembourg VAT group, so as to enable it to reach the level of acceptance of VAT groups already in place in 18 EU Member States.

Besides that, the Luxembourg VAT authorities issued Circular 788 on 13 September 2018 to communicate which VAT offices will be in charge of the supervision of the VAT groups based on their main economic activity.

Transposition into the Luxembourg VAT Law of article 1 of EU Directive 2017/2455 dated 5 December 2017 regarding VAT obligations applicable to the supply of services and distance sales

The Law dated 18 July 2018 implements article 1 of EU Directive 2017/2455.

Below are the main changes in force as of 1 January 2019

  • The threshold for application of the distance sales scheme will also be applicable to the telecommunication services, radio and television broadcasting services, as well as electronically supplied services rendered to non-taxable persons
  • In case the threshold (EUR 10,000 per year, VAT excluded) is not exceeded, the service supplier will have the option to apply the general rule under article 17, 2, 7°bis of the Luxembourg VAT Law (i.e. the place of supply of the services shall be the place where the non-taxable person is established, has its domicile or its habitual residence) for a minimum period of two years, by submitting a form to the Luxembourg VAT authorities. In this case, the service supplier shall observe the Luxembourg invoicing rules.
  • Additionally, the service supplier rendering telecommunication services, radio and television broadcasting services as well as electronically supplied services to non-taxable persons established in another EU Member State should declare the aggregated value (VAT excluded) of the services supplied during the tax period to the Luxembourg VAT authorities.