The Luxembourg Minister of Finance submitted to the Parliament on April 13th 2018 a new draft law No. 7278, introducing the VAT group regime in Luxembourg (the “Draft Law”). This follows the repeal on November 23rd 2017 of the Grand-Ducal Decree dated January 21st 2004 regarding the VAT exemption of services supplied by independent groups of persons to their members, aimed at aligning the Luxembourg VAT legislation with the conclusions of the ruling of the European Court of Justice dated May 4th 2017 (C-274/15) (please refer to our December 2017 Article).
The Draft Law provides that persons established in Luxembourg and closely linked in financial, economic and organisational terms may opt to be considered as a single taxable person for VAT purposes. For the purpose of assessing the existence of a financial link between legally independent entities, the Draft Law refers to the provisions of the Luxembourg company law regarding group consolidation, where either a majority of voting rights, the right to appoint a majority of board members or an exclusive control by virtue of a shareholders’ agreement or similar contractual agreement is required. The economic link is defined in the Draft Law as the situation where (i) two or more entities share a principal activity of the same nature, (ii) two or more entities carry out activities which complement or influence each other or are part of the pursuit of a common economic objective or (iii) the activity of one entity is carried out in whole or in part for the needs of the economic activities of one or several other entities. Finally, an organisational link is deemed to exist, where (i) two or more entities are legally or factually under a common management, (ii) two or more entities organise their activities wholly or partially in consultation or (iii) two or more entities are legally or factually under the control of the same person.
The Draft Law provides that each entity can only be a member of one single VAT group and that the election for the VAT group regime needs to cover a period of at least two calendar years. The consequence of the formation of a VAT group is that transactions between the members of the VAT group are considered as out of scope of VAT.
Besides the main objective of the Draft Law, i.e. the implementation of the VAT Group regime, the Draft Law also introduces the concept of normal value (“valeur normale”), a concept similar to the arm’s length principle applicable in direct tax matters, into the VAT legislation in order to prevent tax fraud and avoidance in transactions entered into between members of the same family or related entities. According to the rules laid down in the Draft Law, the normal value will serve as the taxable basis for VAT purposes, in cases where such normal value is higher than the consideration agreed upon among the parties and where the beneficiary of the supply or the service recipient / service provider (as the case may be) has no (or limited) input VAT deduction right.