VAT Circular N°790 Dated 18 January 2019 – Fair Market Value And VAT

OUR INSIGHTS AT A GLANCE

The Luxembourg VAT Authorities released Circular n°790 in which they have provided some clarifications on the taxable basis to be considered in transactions involving related parties. The Circular requires that transactions involving related parties be charged at "open market value". If this was not the case, the VAT authorities would be entitled to take into consideration that "open market value" and to reconsider the VAT deductible rights of the taxable person. Related parties should properly reflect that the fees agreed or charged are consistent with the open market value criteria. On 18 January 2019, the Luxembourg VAT Authorities released Circular n°790 (hereafter "the Circular") in which they have provided some clarifications on the taxable basis to be considered in transactions involving related parties. This Circular comments on the 2018 Luxembourg VAT Law amendments establishing new VAT rules for transactions between related parties.

Purposes of the new regime

These new rules aim at avoiding fraudulent or abusive situations that could lead to undue VAT advantages. The typical situations for which the above-mentioned anti-abusive rules have been implemented are, for instance, cases where the VAT deduction right could be positively impacted by an artificial increase of the fees charged for transactions allowing a full VAT recovery, or the situation where the fees subject to VAT invoiced to entities without VAT deduction right are artificially decreased to lower the VAT cost for these entities.

The concept of "open market value"

The key concept surrounding these new rules is the concept of "open market value". This notion is defined by the Luxembourg VAT Law and the VAT Directive as "the full amount that, in order to obtain the goods or services in question at that time, a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax".

Scope of application and impacts

In terms of scope, the Circular and the related legal provisions apply in situations where two cumulative conditions are met.

The first condition relates to the persons involved in the transaction and the links between each other. The transaction shall be carried out between related persons. This first condition is fulfilled where the transaction is...

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