The Court of Justice of the European Union has finally reached its decision in the Commission against Luxembourg case (C-274/15, 4 May 2017)
After a few years of suspense, the Court of Justice of the European Union (“the Court”, “the CJEU”) released its decision in the Commission against Luxembourg case this Thursday, specifying when the VAT exemption on the services provided by independent groups of persons to their members applies.
Reminder of the facts and of Advocate General Kokott’s opinion:
The European Commission (“the EC”) challenged the implementation of article 132, 1, f) of the VAT Directive1 in Luxembourg. The Luxembourg Law on VAT provides for the exemption of services supplied by independent groups of persons (“IGPs”) to their members, and Grand Ducal decrees establish further conditions where this exemption applies. The EC asked the Court to declare that the way Luxembourg implemented article 132, 1, f) was contrary to the VAT Directive on three different grounds:
In her opinion, given on 6 October 2016, Advocate General Kokott supported the position of the EC. First, she explained that the services supplied by the IGP to its members should be directly necessary to their VAT-exempt / out-of-scope activity. In cases where an IGP also carries out a taxable activity, the application of the VAT exemption provided under article 132, 1, f) of the VAT Directive should not be possible. Advocate General is also of the opinion that the IGP should be considered a taxable person (different from its members). As a consequence, any right to deduct the input VAT should only benefit the group and not the members, even when the latter would ultimately use the services rendered by the group. Finally, the members have to apply VAT on the services supplied or goods sold to the IGP. This should imply a final cost for the members.
Decision of the CJEU:
Regarding the first plea in law, the Court stated that the legislation at stake, which does not restrict the VAT exemption to the services of the IGP that are directly necessary for the out-of-scope / VAT-exempt activities of its members, is not compliant with the VAT Directive. As a consequence, the Luxembourgish legislation should be modified; the Court followed the statement of Advocate General Kokott on this point.
Regarding the second and third grounds, the Court stated that the IGP should be considered a taxable person for VAT purposes and be distinguished from its members. This means that the right to deduct VAT should be granted only to the taxable person acquiring directly and using the services/goods for the purposes of taxable transactions (the IGP). Hence, the members of an IGP should not be able to deduct the input VAT on the services recharged by the IGP to the members according to their prorata.
Finally, this also implies that the allocation of costs from the members to the IGP should in principle be subject to VAT.
Following this judgment, it appears that Luxembourg failed to fulfil its obligations under EU law. It is now up to the Luxembourgish legislator to correct the infringement and amend the existing national rules in order to comply with the VAT Directive. However, the extent to which IGPs will remain feasible under the revised rules still needs to be determined. Complying with all the requirements and conditions set by the Court and the EC will constitute a massive challenge for banks and insurers.
In this respect, some alternatives (e.g. VAT grouping) should be suggested and brought to companies that are currently making use of the IGP exemption. They should also be given enough time to adjust their existing structures and business models.
1 Directive 2006/112/EC 28 November 2006 on the common system of value added tax
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