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back to index backEUROtalk November,  2016


European Union: AG opines Luxembourg VAT exemption for cost-sharing groups incompatible with EU law

Advocate General Kokott of the Court of Justice of the European Union (CJEU) delivered her opinion on 6 October 2016 in the infringement case brought by the European Commission against Luxembourg, regarding its implementation of the cost-sharing” exemption in the EU VAT directive.

Under the directive, the exemption applies when two or more persons or organizations with exempt (financial, insurance, real estate, hospital, etc.) and/or nonbusiness activities (nonprofit organizations or public bodies) join together on a cooperative basis to form an independent cost-sharing group to make supplies of services to members. However, to qualify for the exemption, the members’ activities must be exempt from VAT (or be beyond the scope of VAT, for nonprofit organizations and public bodies); the shared services must be directly necessary for the members’ activities; and the group must claim reimbursement of each member’s share of the joint expenses.

Under Luxembourg law, the services provided by an independent group to its members are completely free of VAT, provided the taxed activities of the group member do not exceed 30% of annual turnover (or 45% in certain cases). (Other EU member states allow similar thresholds of taxable turnover, e.g. 10% in Belgium and 20% in France.) Group members are permitted to deduct the VAT charged to the group on purchases of goods and services, up to an amount consistent with their VAT deduction rights and their shares in the cost-sharing services. Under Luxembourg’s administrative practice, operations carried out by a member in its own name, but on behalf of the group, are regarded as nontaxable.

The European Commission considers these rules to be incompatible with EU law, and in 2011 it officially asked Luxembourg to revise its VAT rules relating to an independent group of persons. Since Luxembourg did not amend the rules, the commission referred the case to the CJEU on 8 June 2015.

AG Kokott’s opinion recommends that the CJEU conclude that Luxembourg has infringed the VAT directive by exempting services supplied by autonomous groups to their members in cases where the services are not directly necessary for the members’ exempt activities, by allowing an input tax deduction to members where supplies are made to the groups – as an example, hospitals would be able to use the exemption for expensive equipment, but not to share administrative services that could be used for both exempt and taxable activities. The AG further opined that Luxembourg should not have adopted an administrative practice that ignores for VAT purposes purchases that are made by the member in its own name but for the account of the group.

The CJEU now must issue its decision in the case.

Comments

The cost-sharing exemption is widely applied in many EU member states. It is worth noting that the commission stated in a 2010 working document that the regime is underused, due to overly restrictive conditions imposed by some member states and a lack of guidelines in some other member states. Thus, it was somewhat of a surprise for the commission to challenge the Luxembourg regime, which is designed to offer a flexible and practical tool for the sharing of costs and resources.

Source: Deloitte - GAI




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