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Input volume 6, issue 3

Vol. 6 n◦ 3 March 2006


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Refreshing the VAT aspects of financial services: the European Commission consults

Is an update to the 6th Directive regarding financial services in sight? The consultation stage (the step prior to the preparation of a modification of the 6th Directive) has been launched by the Commission.

Entered into force in 1977, the 6th Directive requires an update to adapt it to the complexity of financial services, to render it simpler in its use by financial operators, and to reduce distortion in competition that the 6th Directive may trigger.

Many aspects of the financial sector could benefit from this update, in the context of outsourcing services, pooling support services, sub-contracting…

By way of introduction to this complex project, we would cite some suggestions considered by the Commission. In light of the current difficulties related to the non deductibility of input VAT, the Commission suggests some ideas:

  • The introduction of a 0% VAT rate (with a possibility to recover input VAT) in relations with taxpayers;
  • The broadening of the number of exempted services;
  • The simplification of the rules applying to partial exemption;
  • An option to tax services that are normally VAT exempt;
  • The creation of cross-border VAT bodies (with thoughts on the VAT implication of the « Societas Europaea »).

From a Luxembourg point of view, the project of the Commission will undoubtedly represent an opportunity to review the impacts of VAT in the financial sector, and the hope to see the implementation of the independent group of persons in all Member Countries, in order to facilitate the structure of support services without any VAT impact …

Abuse of law recognized by the European Court of Justice in the « Halifax plc » case

In a judgment rendered on 21 February 2006, case C-255/02, the European Court of Justice has ruled that the right to recover Input VAT could be limited if it constitutes an abusive practice.

The recognition of the abuse of rights’ theory for VAT is groundbreaking for the Court of Justice, as the theory does not exist or is not used in the same way in all EU member countries.

The Court of Justice gives a definition of the concept of the abuse of law. The application of the conditions laid down by the Sixth Directive and the national legislation transposing them can constitute an abuse of law, if:

  • This application is contrary to the purposes of the provisions of the 6th Directive and the national legislation transposing it; and
  • The essential aim of the transactions concerned is to obtain a tax advantage.

What consequences arise if an abuse of law is constituted? The Court of Justice excluded tax penalties, but has ruled that the operation has to be redefined (in order to re-establish the situation that would have prevailed in the absence of the transactions constituting that abuse of law), and the input VAT unduly paid to the taxpayer has to be paid back / or the relevant output VAT paid to the authorities.

This decision will have a very specific impact in Luxembourg, as the theory of abuse of law, subject to doctrinal controversy, has not yet been applied to the VAT sector. But for how much longer?

Direct tax authorities and VAT authorities: towards a reinforced coordination

The government Council adopted a project of law on 24 February 2006 for the reinforcement of the structures of direction of the tax authorities.

On this basis, the Direct Tax Authorities and the Indirect Tax Authorities will both have a direction committee, with a director and two assistant directors. The committee is preside over by the director and takes its decisions on a collegial basis.

At the same time, a coordination committee for the tax authorities will be set up at the level of the finance Ministry with the purpose of reinforcing the coordination between these three authorities. This group will be presided over by the Finance Minister or his delegate and will be made up of directors and assistant directors of the relevant authorities.

The purpose of this project is a better control of the international challenges Luxembourg is facing in the tax area, an increase in cooperation between the tax authorities and an optimization in the internal procedures.

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