Luxembourg: VAT group regime sees light in Luxembourg

On April 16 2018, the draft Bill introducing a VAT group regime in Luxembourg was made public. The law is expected to become effective on July 31 2018.

The main effect of a VAT group is that all supplies of goods or services between group members are treated as internal transactions and, thus, are not subject to VAT. The VAT group regime, therefore, is advantageous for taxpayers, such as asset managers, banks, insurance companies, management companies of funds, and so on, that are unable to fully recover the VAT on their costs. The regime is also beneficial for taxpayers performing services or industrial or trading activities that can fully recover VAT because they will no longer have to 'pre-pay' the recoverable VAT on transactions between group members. Other advantages include the ability to consolidate debts and receivables and reduced compliance requirements. Significantly, all group members will be jointly liable to the VAT authorities for the VAT due by the group.

The regime will allow two or more persons established in Luxembourg, including individuals and legal persons, as well as Luxembourg branches of foreign companies to opt to be treated as a single taxpayer for Luxembourg VAT purposes. However, the persons must be closely connected by financial (i.e. 50% of the voting rights or de facto control), economic (similar or integrated activities or a common business purpose) and organisational (common de jure or de facto management) links. Passive holding companies may be members of a VAT group, which may be of interest to the numerous private equity, real estate and international holding structures established in Luxembourg. Persons that fall within the three categories of links may 'opt out' of group membership if they are not interposed in the economic flows between two members and if this does not lead to a VAT advantage for this person or the group.

The VAT group will be required to request a new VAT ID number and provide information to the tax authorities on the members, links, activities and organisation. The group's VAT number will be used for corresponding with the VAT authorities and filing VAT returns consolidating all transactions with third parties. Group members no longer will have to file separate VAT returns. VAT numbers that existed before the group was formed will remain active as 'auxiliary' VAT numbers of the group and will be used for relationships with third parties.

The introduction of a VAT group regime will be a major change to Luxembourg VAT law. Economic operators should consider this potential new opportunity, which must be viewed from various perspectives, i.e. members to be included or to opt out, the absence of VAT or pre-financing of VAT on transactions between group members, the volume of these transactions and pre-financing, accounting and IT changes, as well as the reduction in the number of VAT returns to be filed and payments.