CJEU: Luxembourg interpretation of EU VAT exemption too wide

Under the VAT directive the 'cost sharing exemption' exempts goods or services supplied by IGPs, sometimes known as cost sharing groups, to their members from VAT under certain conditions. Luxembourg's legislation, however, gave these groups an exemption that went beyond what the European directive had intended, the CJEU said.

Luxembourg has interpreted the 'directly necessary' condition within the exemption so that supplies made by an IGP to its members could fall within the exemption when the respective member's turnover excluding VAT from related activities accounts for no more than 30%, and in certain cases 45%, of its total turnover excluding VAT, the Court said.

Members of a group are also allowed to deduct VAT invoiced to the group in respect of purchases of goods or services supplied not to the members, but to the group itself, under Luxembourg's legislation.

A third complaint related to the treatment of expenses incurred by a member on behalf of the IGP. The allocation of those expenses to the group is currently treated by Luxembourg as outside the scope of VAT.

The interpretation of the cost sharing exemption by Luxembourg is not in line with the purpose of the exemption as laid down in the VAT directive, the Court said, as it upheld an action brought by the European Commission for failure to fulfil obligations.

Any exemption from VAT constitutes an "exception to the general principle that all services supplied for consideration by a taxable person are subject to that tax", the CJEU said.

The VAT directive states clearly that only the services rendered by an IGP that are directly necessary for the exercise of the VAT exempt or non-taxable activities of its members, can be treated as VAT exempt based on the cost sharing exemption, the judgment said.

An IGP within the meaning of the exemption is a taxable person in its own right, independent of its members. Contrary to what Luxembourg allows, this means that members may not deduct VAT invoiced to the group in their own VAT return, the CJEU said.

The group's independence also means that any transaction between the group and a member should be seen as a transaction between two taxable persons, and thus within the scope of VAT. Transactions by a member in his or her name, but on behalf of the group, should fall within that scope. Luxembourg has again failed to transpose this correctly, the Court said.

The CJEU judgement is the first of four cases pending before the CJEU.

The questions referred to the CJEU focus mainly on the interpretation of the conditions as set out in the cost sharing exemption, but also address the possibility of applying the exemption in cross-border situations or to services received from third countries and the discretion of member states in restricting the application of the exemption to certain sectors.

Tax expert Maryse Heijnen of Pinsent Masons, the law firm behind Out-Law.com said: "It is clear from the opinions of advocate general Kokott and Wathelet on the scope of the exemption that they do not share each others view and although the methodology in assessing the scope is similar, the end conclusions of both AG's are very dissimilar."

"We will have to wait for the judgment of the court in all the four cases to fully understand the scope of the exemption and the application of the exemption in the UK. The UK currently has a 15% threshold in relation to the 'directly necessary' test and any business capable of meeting the relevant criteria/conditions has the opportunity to use the cost sharing exemption," Heijnen said.

"If the CJEU would fully follow the opinion of advocate general Kokott in the several cases before the court, it will have a significant impact on and possible restriction of the application of the exemption in the UK" she said