On June 11th 2018, the Luxembourg VAT authorities issued a circular letter No. 765-1 (the “Circular”), extending the scope of application of the circular letter No. 765, released in 2013, to VAT taxable persons carrying out both economic and non-economic activities.
Through the Circular, the VAT authorities announced that their views on the computation of the deductible input VAT, expressed in the 2013 circular, and applying to VAT taxable persons carrying out VAT taxable and VAT exempt activities (so-called “assujettis mixtes”) will also apply mutatis mutandis to VAT taxable persons carrying out economic activities (falling within the scope of VAT) and non-economic activities (falling outside the scope of VAT) (“assujettis partiels”).
The Circular is to be read in the context of the Portugal Telecom and the Securenta cases (European Court of Justice, September 6th 2012, C-496/11 and European Court of Justice, March 13th 2008, C-437/06). Pursuant to those cases the deduction system provided for by the Council Directive 2006/112/EC of November 28th 2006 on the common system of value added tax (the “VAT Directive”) only covers cases in which the goods and services acquired are used by a taxable person to carry out economic transactions which give right to deduct or do not give right to deduct input VAT (goods and services for mixed use). The methods and criteria for apportioning input VAT between economic and non-economic activities within the meaning of the VAT Directive are in the discretion of the Member States. Exercising that discretion, Member States must have regard to the aims and broad logic of the directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activity.
A recent judgement rendered by the Luxembourg-City District Court (Tribunal d’arrondissement de Luxembourg) pointed out that the Luxembourg legislator has not, to date, enacted any specific statutory provisions clarifying how to determine the potentially deductible portion of input VAT allocated to the economic activities of a taxable person who carries out non-economic activities as well (Luxembourg-City District Court, November 22nd 2017, docket number 177382). Even though the Circular does not, strictly speaking, constitute a binding legal provision for taxpayers, it nevertheless provides useful guidance on how the VAT authorities will determine the potentially deductible portion of input VAT going forward.
The Circular essentially refers to the 2013 circular, which establishes a hierarchy between different methods of calculation of input VAT deduction rights. The preferred method is the “direct allocation method” by way of which every expense should be allocated, based on its nature and purpose, to either the company’s economic activities or the company’s non-economic activities. Expenses relating to activities that do not fall within the scope of VAT should be isolated and should not be taken into account when determining the right to deduct input VAT. Nonetheless, the authorities acknowledge that a direct allocation may not be possible for every type of expense. In that case, taxable persons should use a lump sum pro-rata method (preferably based on objective criteria appropriately reflecting the economic reality, alternatively based on income).
Share on
