Input VAT - Deduction

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Input VAT is VAT paid to suppliers.

The deduction regime was introduced with the aim of not increasing the cost of goods and services and ensuring full neutrality with respect to this tax for taxable persons.

In the context of their business activity, taxable persons must also pay the VAT central revenue office of the Registration Duties, Estates and VAT Authority (AED) the difference between the VAT collected on sales to clients and the deductible VAT paid on purchases from suppliers.

VAT to be remitted = VAT collected (output) - deductible VAT (input)

If the input VAT amount is higher than the amount of VAT payable by the taxable person, the surplus can either be refunded or carried forward to the next taxable period to then be deducted.

Who is concerned?

Input VAT can be deducted by any VAT-registered taxable person, i.e. anyone who independently and habitually carries out any form of economic activity, whatever the purpose or results of this activity and wherever it takes place.

It therefore cannot be deducted if the goods or services acquired are used to carry out exempted activities or if the taxable person is not obliged to apply VAT to the revenue derived from its activity.

It will only be partially deducted if the goods or services are acquired to carry out both taxable activities and exempted activities or activities falling outside the scope of VAT.

Prerequisites

Preliminary steps

In order to be able to deduct input VAT, the taxable person must be able to provide all supporting documents (e.g. invoices, transport documents, payments, etc.) at the request of the Registration Duties, Estates and VAT Authority.

Deadlines

As a general rule, the deduction of input VAT must be declared on the VAT return relating to the period in which the VAT became payable.

However, if the taxable person avails themselves of the actual income tax scheme (by option only and provided that the annual turnover excluding tax < EUR 500,000), the deduction of input VAT is only permitted from the moment the relevant invoice has been paid.

How to proceed

Deductible VAT

Only Luxembourg VAT is deductible in Luxembourg.

Refunds of foreign VAT levied on costs incurred in another Member State must be the subject of a direct request to the relevant authorities in said Member State.

The deduction of Input VAT is only for VAT levied on goods and/or services necessary for the operation of the company. In this case, the taxable person may, on their periodic and/or annual declaration, deduct:

  • tax paid to another taxable person in Luxembourg;
  • the tax declared on its intra-Community transactions;
  • and tax declared or paid on imported goods or services.

If the goods or services are not fully linked to its business activity, the taxable person must determine a pro rata deduction. This must be:

  • less than 90% of the total amount of non-deductible tax;
  • less than EUR 250 per calendar year.

VAT can be recovered in 2 different ways, either:

  • the deductible VAT is offset against collected or declared VAT.
    If the result is negative (the deductible VAT is higher than the VAT to be paid), the surplus is carried forward to future VAT declarations associated with the same calendar year;
  • or, the surplus is refunded; this applies to all taxable persons.
    In theory, this occurs on a monthly basis if the amount is EUR 1,200 or higher. Failing this, it will occur on an annual basis provided that the amount is higher than EUR 2.40.

Adjustments

In principle, all VAT deductions are final. In some cases however, the AED may conduct adjustments.

The VAT to be remitted is calculated as follows:

  • for existing buildings, for 10 years following the purchase => the amount of VAT deducted at purchase x 1/10th per remaining year;
  • for other real estate assets, for 5 years following the purchase => the amount of VAT deducted at purchase x 1/5th per year.

Example: a company acquired a building for business use on 1 February 2002 and it recovered EUR 1,000,000 in VAT.

This company purchased professional equipment on 1 November 2007 and was reimbursed EUR 500 in VAT.

The company then ceased trading on 10 January 2009.

=> Amount subject to adjustment:

For the building: 7 years had passed between the purchase and the date the company ceased trading. The adjustment therefore applies to 3 years (10 - 7).

Adjustment = 1,000,000 - 3/10th = EUR 300,000

For the equipment: 1 year had passed since the purchase. The adjustment therefore applies to 4 years.

Adjustment = 500 - 4/5th = EUR 400

Disappearance of goods (merchandise)

The VAT must be remitted in full, unless the disappearance was caused by an accident.

Companies partially subject to VAT

Some businesses are not subject to VAT on their total turnover as they engage in both taxable and non-taxable transactions. It is reminded that VAT is levied in accordance with the principle of territoriality of tax.

Partially taxable persons

These are companies subject to VAT but that carry out some transactions outside of the scope of VAT, namely:

  • income from financial investments (if the beneficiary of the service is established outside the European Union or in another EU Member State);
  • balancing subsidies: these are subsidies granted to a company to offset the overall loss that it would have incurred if the subsidy had not been granted;
  • indemnities;
  • inter-company aid.

The nature of the income recorded by the business is used to determine whether it falls under the regime applicable to partially taxable persons. Only VAT relating to assets used to carry out taxable transactions is deductible.

Example: banks are partially taxable persons, as some of the transactions they carry out are subject to VAT while the bulk of their financing activity is exempt.

Once a fixed asset has been taken over or purchased, and after having divided the company into different sectors of activity, it is determined whether the fixed assets are related to one or several sectors:

  • expenses concerning assets used exclusively in a sector subject to VAT allow full deduction;
  • expenses concerning assets used exclusively in a sector not subject to VAT do not allow for any deduction;
  • mixed expenses concerning assets that are in relation with both a sector subject to VAT, or similar (entitled to deduction) and a sector not subject to VAT (not entitled to deduction) are partially deductible.

For these expenses, a basis of apportionment is used to determine the amount of deductible VAT. A distinction is made between:

  • the physical basis of apportionment, determined for example according to the salaries paid in each sector, the surface areas used by each sector, etc.;
  • the economic basis of apportionment, fixed according to taxable income in relation to total income.

The deduction thus determined may be adjusted (remittance or additional deduction) if the rate of use of the asset varies by more than 10 percentage points or if the amount of tax, which would result from an adjustment of the deductions for the capital good in question, exceeds EUR 125 for the year concerned, during the 4 years following the acquisition of equipment or the 10 years following the acquisition of buildings.

Example: in year 1, the company purchases equipment. The latter is used for mixed operations at a rate of 40 %, which are subject to VAT.
=> The initial VAT, i.e. EUR 20,000, is therefore deducted in the amount of EUR 8,000 (20,000 x 40 %).
In the second year, the percentage of transactions subject to VAT for which this equipment is now 10 %.
=> The proportion of use varies by more than 10 percentage points in the year following the purchase and the VAT adjustment is calculated over 5 years at a rate of 1/5 per year. The adjustment for year 2 must therefore be performed as follows: 8,000 - (8,000 x 4/5th) = EUR 1,600 to be remitted.
The remittance may be deducted from the company results.

Taxable persons partially exempt from VAT

These are companies that carry out transactions that are within the scope of VAT but are exempt.

Example: intra-EU supplies, exports, etc.

To calculate the amount of deductible VAT, the taxable person partially exempt from VAT must apply the rule of allocation to goods and services:

  • the tax will be deductible if the goods and services were connected with transactions subject to VAT;
  • it will not be deductible if the goods and services were connected with transactions not subject to VAT and not entitled to deduction;
  • the tax will be partially deductible if the goods and services were connected with mixed expenses that are linked both to:
    • transactions subject to VAT;
    • and other exempt transactions.

For these expenses, the pro rata rule will be used to calculate the deductible VAT.
The pro rata rule is used for assets that are common to all transactions. VAT is then deducted by applying the ratio between the income amount entitled to deduction and the turnover for the year:

  • the following are added together:
    • all transactions entitled to deduction;
    • and all international trading transactions, i.e. transactions subject to Luxembourg VAT or that would be subject to Luxembourg VAT if they were carried out in Luxembourg (intra-EU supplies, exports, income from interest or insurance earned outside of the EU, etc.);
  • this is then divided by the sum of the following:
    • the total obtained from the numerator;
    • exempt revenue (but excluding revenue outside the scope of VAT, interest from financial investments within the EU (= dividends received from subsidiaries are outside the scope) and exempt subsidies).

The following income is not included in the numerator or the denominator:

  • indemnities resulting from damages;
  • capital investment subsidies;
  • internal deliveries;
  • ancillary financial or real estate income.

In the event of a change in the pro rata by more than 10 % or if the amount of tax resulting from an adjustment of deductions for the capital goods in question exceeds EUR 125 for the year in question, adjustments must be made for the calculation of the final proportion and for any subsequent changes in respect of the assets.

Who to contact

Central Revenue Office

  • Registration Duties, Estates and VAT Authority Central Revenue Office
    5, rue du Plébiscite L-2341 Luxembourg Luxembourg
    B.P. 1004 L-1010 Luxembourg
    Closed ⋅ Opens at 8.00
    Wednesday:
    8.00 to 12.00, 14.00 to 16.00
    Thursday:
    8.00 to 12.00, 14.00 to 16.00
    Friday:
    8.00 to 12.00, 14.00 to 16.00
    Saturday:
    Closed
    Sunday:
    Closed
    Monday:
    8.00 to 12.00, 14.00 to 16.00
    Tuesday:
    8.00 to 12.00, 14.00 to 16.00
    From 08.00 to 12.00 and 14.00 to 16.00

Related procedures and links

Procedures

Registration for VAT Value Added Tax (VAT)

Links

Legal references

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