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.
Taxable persons must also pay the difference between the VAT collected on sales to clients and the deductible VAT levied on purchases from suppliers in the course of their business activity to the tax office of the Registration Duties, Estates and VAT Authority (AED).
If the input VAT amount is higher than the amount 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.
In order to obtain the input VAT deduction, the taxable person must provide supporting documentation to the Registration Duties, Estates and VAT Authority. This may be:
- the invoice from when the business applies the deductions;
- customs documents in the case of imports;
- a VAT declaration for intra-EU acquisitions;
- the agent’s report;
- the notarised deed for buildings falling within the scope of real estate VAT.
A deduction entitlement exists when VAT is due to the supplier of goods or to the service provider, and is the same for both goods and services.
If the deductible VAT is not reported on the company's VAT declaration, it can rectify the situation by submitting another declaration before 31 December of the year in question.
How to proceed
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.
Input VAT deduction only concerns VAT levied on goods and/or services necessary for the company's activity. In this case, the taxable person may, on their periodic and/or annual declaration, deduct:
- tax paid to another taxable person in the Grand Duchy of Luxembourg;
- tax declared on the intra-EU acquisition of goods;
- and tax declared or paid on imported goods.
Accommodation, catering, hospitality and entertainment expenses are therefore excluded from deduction, with the exception of:
- the provision of accommodation for the company's security personnel;
- expenses incurred for the benefit of third parties (non-employees);
- expenses linked to the fulfilment of the taxable person's contractual responsibilities (for example the cost of accommodation/food provided by an airline to its passengers during an extended stay at an airport).
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 two 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.
In principle, all VAT deductions are final. However, in some cases the AED may conduct adjustments.
Sale of real-estate assets or goods not subject to VAT
The VAT to be refunded 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 recovered EUR 1,000,000 in VAT.
This company purchased professional equipment on 1 November 2007 and was reimbursed for 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 300,000For 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 is fully refunded, unless the disappearance was caused by an accident.
If the goods or services are not involved in a taxable transaction (e.g. free delivery of merchandise), the VAT is fully refunded.
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. NB: VAT is levied according to the territorial application of tax principal.
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;
- inter-company aid.
The nature of the income recorded by the business is used to determine whether it comes under the regime applicable to partially taxable persons. Only VAT relating to assets used to carry out taxable transactions is deductible.
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 connected solely with a sector on which VAT is payable will be subject to a full deduction;
- expenses concerning assets connected solely with a sector on which VAT is not payable will not be subject to any deduction;
- mixed expenses concerning assets connected both with a sector on which VAT is payable or similar (entitled to deduction) and a sector on which VAT is not payable (not entitled to deduction) are partially deductible.
For these expenses, a basis of apportionment is use 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.
Deductions determined in this manner may be adjusted (subject to an additional deduction or refund) if the usage rate of the fixed asset varies by more than 10 percentage points during the 4 years following the purchase of equipment or during the 10 years following the purchase of buildings.
=> The initial VAT, EUR 20,000, is therefore subject to a deduction of EUR 8,000 (40% of 20,000).
In year 2, the percentage of transactions subject to VAT for which this equipment is used changes to 10%.
=> As the usage proportion has varied by more than 10 percentage points during the year following the purchase, there will be a VAT adjustment calculated over 5 years at a rate of 1/5th per year. The adjustment for year 2 must therefore be performed as follows: 8,000 - (8,000 x 4/5th) = 1,600 to be refunded.
The refund may be deducted from the results of the business.
Taxable persons partially exempt from VAT
These are companies that carry out transactions that are within the scope of VAT but are exempt.
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 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 fixed assets 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;
- exempted income (although income outside of the scope of VAT, interest from financial investments (dividends received from subsidiaries are out-of-scope) and exempted subsidies are not included).
- indemnities resulting from damages;
- capital investment subsidies;
- internal deliveries;
- ancillary financial or real estate income.
In the event of a pro rata variation of more than 10%, adjustments should be carried out to calculate the definitive pro rata and for any subsequent modifications in respect of fixed assets.