Under Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax as amended ("VAT Directive"), services provided by a taxable person (company or individual) are subject to VAT. However, Article 132(1)(f) provides an exemption, under certain conditions, for services rendered by an independent group of persons ("IGP") to its members, which has been literally implemented into Luxembourg VAT Law 1and further specified in the Grand Ducal Regulation of 21 January 2004.
In its judgment of 4 May 2017 , the Court of Justice of the European Union ("ECJ") ruled that Luxembourg's extensive interpretation of the IGP regime had led to an implementation of the exemption that was not in line with the VAT Directive.
Following the arguments of the European Commission which initiated the infringement procedure against Luxembourg, the ECJ held three grounds for complaint:
(1) It follows from the wording of Article 132(1)(f) that the exemption applies to the supply of services by an IGP to its members provided that (i) the services are directly necessary for the exercise of the member's activities and (ii) that these activities are either exempt or concern those members that are not taxable persons.
The current Luxembourg IGP regime extends the benefit of the exemption to members of the IGP who also carry out taxable activities, under the sole condition that their annual turnover free of VAT derived from these taxable activities does not exceed 30% (or 45% in certain cases) of the member's total annual turnover free of VAT related to all their taxable and exempt activities.
The ECJ ruled that the IGP regime does not prevent members of an IGP from exercising taxable activities. However, such members may only benefit from the exemption, "in so far as those services are directly necessary for those members' exempt activities or in relation to which they are not taxable persons". Consequently, the services provided by an IGP to its members that are directly necessary for the latter's taxable activities are subject to VAT.
(2) Luxembourg has wrongly authorised members of an IGP to deduct, from the VAT they are liable to pay on their taxable transactions, the VAT due or paid by the IGP with respect to the goods and services received for the purpose of its own activities.
The ECJ recalled that "the IGP is a taxable person in its own right, which is separate from its members who are also taxable persons". Hence, in light of the general principle of VAT neutrality, members cannot be entitled to a right of deduction regarding the VAT borne by the IGP on its own input transactions, from their own VAT liability.
(3) Luxembourg IGP regime excludes from the scope of VAT the allocation to the IGP, by one of its members, of expense incurred by that member in his name, but on behalf of the IGP. On the contrary, the ECJ considered such a transaction to be subject to VAT, notably because the IGP and its members are both separate taxable persons for VAT purposes.
Footnote
1 Article 44(1)(y) of the Law of 12 February 1979 on value-added tax.
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