On May 4th 2017, the European Court of Justice (“ECJ”) released its judgement in the Commission vs. Luxembourg case (C-274/15). The ECJ followed the European Commission’s position and ruled that Luxembourg has failed to fulfil its obligations under Article 132 (1) (f) of Directive 2006/112/EC of November 28th 2006 on the common system of value added tax (the “VAT Directive”).
The latter provision provides that Member States should exempt “the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses”.
Luxembourg’s implementation of the VAT exemption of services supplied by independent groups of persons (“IGP”) to their members was considered too broad by the ECJ on three counts.
First, the ECJ held that the wording of article 132 (1) (f) of the VAT Directive limits the exemption to the supply of services which are directly necessary for the exercise of the IGP’s members’ exempt or out of scope activities. Under Luxembourg’s IGP regime, members of the IGP were however allowed to carry out taxable activities up to a threshold of 30% of their annual turnover, without losing the benefit of the exemption of services provided to them by the IGP. Even though, according to the ECJ, the IGP regime is not limited to groups whose members exclusively perform non-taxable activities, the judges clarified that the exemption only applies to those supplies of services which are directly necessary to the members’ non-taxable activities. General overhead expenses invoiced by the IGP to any member carrying out VAT taxable activities should thus not fall within the scope of the exemption.
Luxembourg’s IGP regime has further been declared non-compliant with the VAT Directive by the ECJ because it allowed the members – to the extent of their own input VAT deduction rights – to recover VAT incurred by the IGP on its costs. The ECJ stressed that the IGP itself is to be considered as a taxable person in its own right (separate from its members). As a consequence, the members should not be entitled to recover any VAT borne by the IGP.
Finally, the ECJ held that the allocation to the IGP, by one of its members, of expenses incurred by that member, in its name but on behalf of the IGP, is a transaction which falls within the scope of VAT. Luxembourg was thus not entitled to consider such transactions as out of the scope of VAT.
As a result of the ECJ’s judgement, Luxembourg will be required to change its current legislation and administrative practice with respect to IGPs which may have an impact on those taxpayers currently benefiting from the IGP regime.