Luxembourg: VAT exemption on services provided to group members

Luxembourg: VAT exemption on services

The Court of Justice of the European Union today issued a judgment concerning when an exemption from value added tax (VAT) on services provided by independent groups of persons, to their members, applies.

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The case is: Commission v. Luxembourg, C-274/15 (4 May 2017)

Summary

The European Commission (EC) challenged implementation of article 132, 1, f) of the VAT Directive in Luxembourg. The Luxembourg VAT law provides an exemption from VAT on services supplied by independent groups of persons to their members. Grand Ducal decrees establish further conditions when the VAT exemption applies. 

The EC requested that the CJEU find that the manner under which Luxembourg implemented article 132, 1, f) was contrary to the VAT Directive. An opinion of the CJEU Advocate General in October 2016 supported the position of the EC. 

Today’s CJEU judgment effectively concludes the rules for the VAT exemption relating to the services provided by groups to their members are not compliant with the VAT Directive. The CJEU found the group must be considered a “taxable person” for VAT purposes and, thus, must be distinguished from its members. This means that the right to deduct VAT is granted only to the taxable person acquiring directly and using the services/goods for purposes of taxable transactions. Hence, the members of the group are not able to deduct the input VAT on the services recharged by the group to the members.

KPMG observation

The judgment implies that the allocation of costs from the members to the group would be, in principle, subject to VAT. It now appears that Luxembourg has failed to meet its obligations under EU law and that it must amend its existing national rules in order to comply with the VAT Directive. The extent to which groups would remain feasible under such revised rules would need to be determined. Complying with all the requirements and conditions set by the CJEU and the EC could present challenges for banks and insurers. In this respect, some alternatives (e.g., VAT grouping) may be considered by companies that are currently making use of the group exemption. 

 

Read a May 2017 report prepared by the KPMG member firm in Luxembourg

KPMG observation

What are the implications of the judgment for other EU Member States? In the Netherlands, taxpayers that apply the "costs for joint account" principle may deduct the VAT on costs in proportion to their financial contribution. However, when applying this principle the party paying the costs must also bear part of the costs itself. The Supreme Court confirmed the VAT deduction by the participants in this type of cooperation (case no. 42.312). In addition to this, there are specific approvals in the Netherlands for other forms of cooperation.

At present, three other cases about the application of the VAT exemption for cost-sharing groups are pending before the CJEU. All of these cases, including the infringement proceedings against Luxembourg, could have far-reaching implications for the application of the VAT exemption for cost-sharing groups.

 

Read a May 2017 report prepared by the KPMG member firm in the Netherlands

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