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Tax Connect Flash | VAT | First clarifications on the exemption regime for services provided by cost-sharing groups


Luxembourg’s condemnation may have consequences in other EU jurisdictions

In a judgement dated 4 May 2017, the Court of Justice handed down an initial set of clarifications regarding the scope of VAT exemption applicable to services provided to its members by an independent group of persons (IGP) pursuant to article 132 paragraph 1 point f of the VAT Directive.

Luxembourg was found to have contravened the Directive on the grounds of an interpretation of the provisions in question which, it should be remembered, also apply to all other Member States.

The three objections issued by the European Commission are confirmed, although some of their implications require closer scrutiny.

Since the exemption only relates to services directly necessary to carry out its members' exempt or non-taxable activities, the Court finds, regarding the first objection, that the Luxembourg regulation cannot validly allow unreserved exemption for services provided to its members on condition that their taxable activities do not exceed 30% of all their activities.

In this respect, the conclusions of Advocate General Juliane Kokott appeared to rule out any possibility of exempting services that would both be used by a group member for the purpose of both taxable and non-taxable activities (general costs (e.g. overheads, IT services, etc.).

The Court's ruling is more nuanced, however. It states that Luxembourg "has not shown why, if at all, it might be excessively difficult for the IGP to invoice its services excluding VAT, according to the share of its members’ activities in their totality represented by the activities which are exempt from that tax or in relation to which they are not taxable persons." (point 54 of the judgement). In contrast to the Advocate General's conclusions, we believe that this comment can only be interpreted as offering the possibility that the services provided by the group are partially exempt in proportion to their use by each member for its non-taxable activities.

Regarding the other two objections, however, the Court confirms the position adopted by its Advocate General:

  • firstly, when carrying out a taxable activity, members of an independent group of persons are not permitted to deduct VAT applicable to the group's expenditure;
  • secondly, the exemption stipulated in article 132, par. 1 f) of the Directive does not apply to services provided to the group by one of its members.

This judgment may have significant consequences in several Member States depending on how the IGP regime applies so far.

But the CJEU's work to interpret the scope of the exemption rules applicable to services provided by cost-sharing groups is not over, since in three other cases currently pending (Aviva, DNB Banka and Commission vs. Germany), the Court will be required to rule on questions which may have significant repercussions:

  • do the rules apply to all types of exempt activity or only general interest activities, which would particularly exclude banking, financial and insurance activities?;
  • can the group be stripped of its legal personality and under what conditions?;
  • and finally, are the rules applicable to a group whose members are established abroad?

Once the ECJ will have clarified all those issues, most of member States will likely to adapt their domestic rules for IGP.

Case C-274/15, judgement of 4 May 2017, Commission vs. Luxembourg