VAT formalities

Value-added tax (VAT) covers all stages of production and distribution of goods and services carried out in Member States of the European Union (EU)*.

An economic operator supplying goods within the EU must observe and follow to the corresponding national VAT laws, regardless of the country in which it is established. The Incoterm used on imports can in particular generate VAT obligations at its level.

A set of common rules specified by European Directives harmonizes the application of VAT on transactions between Member States and on transactions to and from the EU fiscal territory.

Each Member State however keeps certain rights, among others, to:

  • set its VAT rates
  • organize payment of the import VAT due
  • define the frequency, time, procedure and format for filing VAT returns.

Luxembourg has an attractive VAT environment:

How VAT functions – neutrality principle

In the context of exchanges of goods and services, VAT is a neutral tax for taxable persons:

  • they pay the VAT amount on their purchases or imports but can recover it
  • they invoice VAT to their customers and then transfer it back to the Member State concerned, after having (totally or partially) deducted the amount of VAT paid on their purchases and imports.

Note: Taxable persons carrying out certain exempt activities can only partially recover VAT, based on a deductible proportion determined on the basis of their transaction subject to VAT.

After their VAT registration, the taxable persons must file their periodic VAT returns as well as their recapitulative annual return. These returns determine the VAT amount to pay or to recover in Luxembourg.

It is thus the final consumer who bears the final cost of VAT when purchasing the end product.

Example of VAT impacts in a supply chain involving import and national supply: A Luxembourg company imports into Luxembourg goods originated in China. It then resells them to a retail store, which in turn, resells them to the final consumers.

VAT must be paid at the different stages of the importation as well as of the sale of the goods and is deductible for the businesses involved:

  • on import, the VAT is due by the importer and is deductible for them
  • on sale to the retailer: the retailer pays the VAT amount to the importer, who in turn collects and transfers it to the State. The VAT is deductible for the retailer
  • on sale to final consumer: the consumer pays the VAT amount to the retailer who collects and transfers it to the State. The final consumer bears the final cost of VAT.
This picture illustrates the VAT impacts in a delivery chain involving import and national delivery
  Importer Retailer

VAT due

Import:   85 EUR (500*17%)

Sale 1:     119 EUR (700*17%)

TOTAL:   204 EUR

Sale 2:     153 EUR (900*17%)

TOTAL:    153 EUR

Deductible VAT

Import:    85 EUR

TOTAL:     85 EUR

Sale 1:     119 EUR

TOTAL:    119 EUR

Balance To pay:    119 EUR
To pay:     34 EUR

How VAT functions - principle of taxation at the place of consumption

VAT is a consumption tax. It is theoretically paid in the Member State in which the good is located for its consumption.

This principle has two consequences. First, the main international movements of good are VAT-exempt in the Member State , in which the goods are located at the time when the dispatch or the transport starts:

  • intra-Community supplies of goods to taxable persons in the European Union with transport in another Member State
    For example: a Luxembourg company sells and delivers goods to a French company. The supply is VAT-exempt.
  • supplies of goods on export, with transport outside the European Union.
    For example: a Luxembourg company sells and delivers goods to a Norwegian customer. The supply is VAT-exempt.

Second, the following purchases are subject to VAT:

  • imports of goods, in the Member State in which release for free circulation is declared to customs
    For example: a Luxembourg company purchases goods from an American supplier. It imports the goods into Luxembourg. It must declare the VAT due on import in Luxembourg.
  • Intra-Community acquisitions (ICA) of goods by taxable persons, in the Member State to which the goods are transported.
    For example: a Luxembourg company purchases goods from a Spanish supplier. It receives the goods in Luxembourg. It must declare VAT due on the ICA in Luxembourg.

 

The use of exemptions requires strict adherence to certain conditions. These conditions vary depending on whether a transaction involves intra-Community supply of goods or exportation. Although exempt, if the place where the goods are located at the time when their dispatch or transport starts is in Luxembourg, then these supplies need to be declared in Luxembourg. Whenever there is an intra-Community supply declared in one Member State, an intra-Community acquisition must be declared in another Member State.

Example of an international supply chain and its VAT impacts: A Luxembourg company imports into Luxembourg goods originated in China. It also purchases goods from a German supplier.

It resells the goods:

  • to a retail store, which then resells them to the final consumers
  • to a French business customer (taxable person).

VAT is due at the different stages of importation, intra-Community acquisition and national sale of goods and is deductible for the businesses involved:

  • on import, VAT is due by the importer and is deductible for that importer
  • on intra-Community acquisition, the VAT amount is due by the purchaser and is deductible for that purchaser
  • on sale to retailer: the retailer pays the VAT to the importer who collects and transfers it back to the State. The VAT paid is deductible for the retailer
  • on sale to final consumer: the consumer pays the VAT to the retailer who collects and transfers it to the State. The final consumer bears the final cost of VAT.

The sale to the purchaser that is a French business is exempt from Luxembourg VAT as an intra-Community supply of goods.

  Importer Retailer

Due VAT

Import:   85 EUR (500*17%)

ICA:         136 EUR (800*17%)

Sale 1:     119 EUR (700*17%)

Sale 2:      0 EUR (exonérée)

TOTAL:   340 EUR

Sale 3:   153 EUR (900*17%)

TOTAL:  153 EUR

Deductible VAT

Import:   85 EUR

ICA:        136 EUR

TOTAL:    221 EUR

Sale 1:   119 EUR

TOTAL:  119 EUR

Balance

To pay:  119 EUR  

To pay:   34 EUR  

 

* From a VAT point of view, one still speaks of the European community and not of the European Union. For reasons of consistency, however, we will use the term "Union" in this portal.

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