Luxemboug under pressure from EC

The European Commission has officially asked Luxembourg to change its rules on VAT in the case of independent groups of persons, saying the principality’s current rules are incompatible with EU law.

The change may affect financial services groups based in the principality.

Currently, services provided by an independent group to its members are completely free of VAT provided that the members' taxed activities do not exceed 30% of their annual turnover (or 45% under certain conditions). The current law also permits group members to deduct the VAT charged to the group on its purchases of goods and services. What’s more, Luxembourg law permits that operations by a member in his or her own name, but made on behalf of the group, are also regarded as non-taxable.

The Commission insists that these arrangements infringe the rules set out in EU law.

Under European law, in order to be exempt from VAT, the services provided by an independent group to its members must be directly required for their non-taxable or exempt activities.

The Luxembourg rule which makes the provision for a ceiling for taxed operations does not, therefore, fulfill this condition, says the EC.

The group's exempt activities must be linked exclusively to the exempt activities of group members. Moreover, group members should not be allowed to deduct VAT charged to the group. The EC is also taking up issue with the fact that under the existing rules, Luxembourg’s arrangements do not take account of VAT rules in EU law applicable to operations by intermediaries.

The Commission's request takes the form of a ‘reasoned opinion’, which is the second step of EU infringement proceedings. If the rules are not brought into compliance within two months, the Commission may refer the matter to the European Court of Justice.

http://ec.europa.eu/eu_law/infringements/infringements_en.htm