EUROPEAN VAT JUDGMENT OF INTEREST FOR LUXEMBOURG HOLDING COMPANIES

On November 6, 2008, the European Court of Justice (ECJ) released its judgment in a case relating to the place of taxation of services provided to a Swedish foundation performing both an activity within the scope of VAT (the provision of assistance and advice) and an activity outside the scope of VAT (essentially the promotion of measures to facilitate employment) – Case C-291/07 “Kollektivavtalsstiftelsen TRR Trygghetsrådet”.

The verdict of the ECJ in this peculiar case is of interest for Luxembourg holding companies contracting with service suppliers established outside Luxembourg.

As a rule, the place of taxation of services is the place where the supplier has established his business or has a fixed establishment from which the services are supplied (i.e. taxation where the supplier is established). A notable exception however applies in the case of “intangible” services rendered in an international context (e.g. services of consultants, lawyers, accountants, etc.). The place of taxation of “intangible” services provided to customers established outside the EU, or to taxable persons established in the EU but not in the same country as the supplier, is the place where the customer has established his business or has a fixed establishment for which the services are supplied (i.e. taxation where the customer is established).

The key question in this recent court case was essentially the following: is a customer (the Swedish foundation) carrying out both an economic activity and an activity outside the scope of VAT to be regarded as a taxable person when it receives consultant services from abroad which are used solely for the purposes of its activity outside the scope of VAT?

The court clarified the matter by answering positively.

Based on a constant jurisprudence of the ECJ, the mere acquisition and holding of shares in a company is not an economic activity within the scope of VAT. Pure holding companies are therefore not taxable persons for VAT purposes. It is only when holding companies also carry out transactions which are within the scope of VAT, such as the supply of services, that they are taxable persons for VAT purposes.

The impact of this judgment is better illustrated by a short example.

When a German consultant provides services to a Luxembourg holding company which also performs an economic activity such as the supply of services for a consideration, the German consultant must invoice his services without German VAT, even if these consultant services are used solely by the Luxembourg company for its activity outside the scope of VAT (passive holding of shares). The Luxembourg company must then self-assess Luxembourg VAT on these services under the so-called reverse charge mechanism. The Luxembourg company benefits from the lower Luxembourg VAT rate (15% instead of 19%) but must meet VAT obligations in Luxembourg, such as requesting for a VAT number and filing VAT returns. These administrative obligations also apply when similar services are provided by suppliers established outside the EU. Applying this reverse charge mechanism is not an option, it is mandatory.

Finally, it is worth being noted that rules determining the right of holding companies to deduct input VAT are not affected by this recent ECJ judgment. As a rule, holding companies cannot recover input VAT. The recovery of input VAT for holding companies is only possible in specific situations. The application of rules determining the capacity of holding companies to recover input VAT is not always straightforward and should therefore not be underestimated.