Luxembourg Tax Alert 2018-15 | KPMG | LU
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Luxembourg Tax Alert 2018-15

Luxembourg Tax Alert 2018-15

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VAT group regime legislation: guidelines in a blink!

In our flash alert dated 16 April 2018, we predicted the advent of the VAT group regime in Luxembourg. It has been confirmed that it will come into force on 1 August 2018.

As per the new article 60ter, para. 1 of the Luxembourg VAT Law (LVATL), entities belonging to a same group, established in Luxembourg and closely bound to one another by a financial, economic and organizational link can opt to form a new single taxable person: the VAT group. Let us review and analyze the main elements of this regime and its consequences.


Why a VAT group legislation?

An answer to the recent EU case-law on independent group of persons (IGPs)

After the recent case-law of the Court of Justice of the European Union (CJEU), the financial and insurance sectors could not benefit from the VAT exemption related to IGPs anymore. It was necessary to find an alternative to maintain competition on the financial place. The Luxembourg government quickly adjusted the legislation on IGPs, working in parallel on the possible implementation of a VAT group regime. This regime is an option included in article 11 of the 2006/112/EC Directive (VAT Directive). This means that not all Member States of the European Union are currently making use of this provision. It is at their discretion to implement it into national law.

Publication of draft bill 7278 on the VAT group regime

On 13 April 2018, the government published draft bill 7278. In the meantime, it launched the required VAT committee consultation on the draft legislation. It is to be noted that the new legislation is not restricted to any sector. Therefore, financial and insurance companies can use this provision. The main consequence of this regime is that all the supplies of goods and services between the members will be disregarded, as they are deemed to be performed within one single taxable person: the VAT group.
 

What are the main conditions to form a VAT group?

The conditions are outlined in the new article 60ter of the LVATL. They have to be fulfilled simultaneously and cumulatively. The companies at hand have to show they meet the so-called “links test”.

The financial link

The financial link refers to the actual control of one entity over the others. In principle, the EU Commission based the existence of this link on a certain percentage of detention in capital/voting rights, amounting to 50%. In Luxembourg, this link is defined by reference to article 1711 (1) (1), points 1, 2 and 3 of the amended Law of 10 August 1915 on commercial companies. More precisely, article 1711 (1) can be found under Title XVII “Consolidated accounts”, Section 1 of Chapter 1 “Conditions and methods to prepare consolidated accounts”. The fulfillment of the financial link therefore goes through the existence of consolidated accounts between companies intending to form the VAT group.

In this respect, consolidated accounts have to be established if:

  1. One company has a majority of the shareholders’ or members’ voting rights in another company; or
  2. One company is able to appoint or revoke a majority of the members of the administrative, management or supervisory body of another entity and is at the same time shareholder or member of the latter; or
  3. One company is the shareholder or member of another entity and controls by itself via an agreement concluded with other shareholders or members of the same entity the majority of the shareholders’ or members’ voting rights in the latter.

The financial link can be direct, as well as indirect, proven either de jure or de facto. Please note that in case one of the derogations to the preparation of consolidated accounts would apply (article 309 (1) of the Luxembourg Commercial Law), the financial link still has to be checked. As we previously mentioned, this link will have to be certified by a chartered accountant (modified Law of 10 June 1999) or auditor (modified Law of 18 December 2009) on a yearly basis.

The economic link

In a nutshell, the nature of the members’ activity of the VAT group should be similar, complementary or influenced by one another. They should be performed totally or partly for the benefit of the other members’ economic activities.

The organizational link

With regard to this condition, the link is fulfilled as soon as persons are de jure or de facto directly or indirectly under a common management structure, or fully or partly in consultation with one another, or de jure or de facto directly under the control of a single person.


What is the scope of application of the VAT group regime legislation?

Personal scope of application

The new article 60ter foresees that all the “persons” established in Luxembourg can opt to form a VAT group. In this respect, the question of what is referred to under the notion of “person” can be answered by citing the CJEU case-law. The CJEU has stated that it should include taxable as well as non-taxable persons. It means that it is possible for legal persons and entities without legal personality to become members of a VAT group.

Territorial scope of application

The VAT group legislation is restricted to the national territory of Luxembourg. Therefore, the possibility to create a cross-border VAT group is prevented.In addition, the transactions between a head office established outside Luxembourg and its Luxembourg branch, member of a VAT group in Luxembourg, will become subject to VAT (application of the Skandia case-law, C-7/13). A contrario — the transactions between a foreign branch, member of a foreign VAT group and its Luxembourg head-office — will be subject to VAT in Luxembourg (“reverse-Skandia” situation).

In this respect, any structure including a foreign branch should be the target of an in-depth analysis, insofar as the creation of a VAT group should entail (positive or negative) consequences.


Are anti-avoidance measures included in the draft legislation?

Yes, there are. Article 60ter specifically foresees a membership period of two years. There is a possibility to exclude the person whose activities would lead to a distortion of competition. Besides, opting out from a group is subject to strict conditions: it should not lead to any VAT savings (either for the entity opting out or the group itself) and the entity wishing to opt out should not be placed between two entities in the value chain. The VAT group legislation states that in case the persons meet the necessary conditions, they must be part of the VAT group. Finally, an entity can only be a member of one VAT group.


Your VAT group in practice?

Assess your situation first.

Your current situation has to be analyzed, as each case is different. If you were previously benefiting from the IGP exemption, you should as well determine which entities you can/must include in the group.

Enroll as a VAT group.

To enroll as a VAT group in Luxembourg, you have to file the VAT option form specifically foreseen to this effect. Note that this form has to be supported by mandatory enclosures (i.e. organizational chart of the group, certification of the financial link, etc.) and has to be submitted within a specific deadline. In parallel, the compliance obligations of the members have to be met (i.e. the future members of a group should file their pending VAT returns), insofar as the VAT group will be the single taxable person. Finally, the Luxembourg VAT authorities will issue a new VAT identification number to the VAT group, which will be used for their relations with each other. However, the members will keep their former VAT identification number which they will use for their relations (internal and with third parties).

Adding a new member?

This is possible and potentially mandatory. You have to assess whether this member fulfills the conditions to become part of the VAT group

What should you monitor during your VAT group’s existence?

Your VAT group has now been created. Note that you will have to meet your compliance obligations: you should prepare the consolidated VAT return of the group (with specific appendices), but separate European sales listings for the members. You should pay attention to potential regularizations (where necessary).

You should check the fulfillment of the links test regularly. More specifically, note that in case a member does not meet the conditions anymore, this has to be disclosed to the Luxembourg VAT authorities within a strict deadline. The members are held jointly responsible for the payment of VAT, late interest, fines and any other charges. Invoicing obligations are borne by the VAT group with regard to third-parties suppliers. The members have to formalize the supplies between each other through pro forma documents.


Conclusion

While being an alternative to IGPs, keep in mind that the VAT group legislation is a different tool and entails strict and detailed requirements, which should be monitored. In this respect, and to prepare for any group creation, your VAT team at KPMG Luxembourg has already performed an in-depth analysis of this legislation. You should therefore not hesitate to contact them, should you wish to create your own VAT group.

[1] See our first flash alert on VAT group regime

 

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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