New Rules Regarding The VAT Taxable Basis Of Transactions Between Related Parties

In August 2018, along with the introduction of VAT grouping provisions, Luxembourg transposed Article 80 of the EU VAT directive (Directive 2006/112/EC) into its domestic VAT legislation.

The newly implemented provisions may be of great significance for business, and their practical implications should therefore be analyzed in detail.

The VAT authorities have also recently provided additional guidelines in a recently issued circular (Circular n°790 of 18 January 2019).

Background

Article 80 of the EU VAT directive provides that member states have the discretion to take measures to combat VAT fraud or evasion. According to this article, the taxable basis of transactions between related parties may be - in some instances - re-valuated according to their normal (in other words, open market) value.

Article 4 of the Luxembourg law of 6 August 2018 transposed Article 80 of the VAT directive into the Luxembourg legislation and a new paragraph 3 was inserted in Article 28 of the VAT law. According to this new provision, the VAT taxable basis for transactions between related parties may be deemed to be the normal value in three different scenarios:

The consideration is lower than the normal value, and the recipient cannot fully recover VAT; The consideration is lower than the normal value, and the transaction does not give the provider the right to recover VAT; The consideration is higher than the normal value, and the transaction gives the provider the right to recover VAT. Related parties

Article 28.3, first indent of the Luxembourg VAT law defines related parties as parties with family or other close personal links as well as organizational, property, membership, financial or legal links.

The notion of related parties appears to be wide, with a scope which is, unequivocally, specific to VAT. For instance, the guidance provided by the OECD in the context of Transfer Pricing is that enterprises are related parties where persons participate directly or independently in the management, control or capital of those enterprises. This definition is somehow narrower than the one given for VAT.

Circular N° 790 does not provide additional details regarding the definition. Some could see this as an indication that the tax authorities do not want to limit their interpretation and keep a flexible approach.

Transactions in scope

Not all transactions between related parties are subject to the new VAT rules. At first glance, the measure is aimed at avoiding VAT...

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