EU authorising Luxembourg to derogate from Article 285 of the VAT Directive - Main contents

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dossier	COM(2022)352 - Amendment of Implementing Decision 2013/677/EU authorising Luxembourg to derogate from Article 285 of the VAT Directive.
source	COM(2022)352
date	26-07-2022

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued added tax ¹ (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 11 March 2022, Luxembourg requested an authorisation to continue to apply, until 31 December 2024, a measure derogating from Article 285 of the VAT Directive, allowing Luxembourg to exempt from VAT taxable persons whose annual turnover is no higher than EUR 35 000.

In accordance with Article 395(2), second subparagraph, of the VAT Directive, the Commission informed the other Member States by letter dated 7 April 2022 of the request made by Luxembourg. The Commission notified Luxembourg by letter dated 8 April 2022 that it had all the information necessary to consider the request.

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply special schemes for small enterprises, including the possibility of exempting taxable persons below a certain annual turnover. This exemption implies that taxable persons do not have to charge VAT on their supplies and, consequently, they cannot deduct the VAT on their inputs.

The possibility of applying special VAT rules including exemptions or graduated tax relief to small undertakings was first introduced by Article 14 of Council Directive 67/228/EEC ² . Member States which did not make use of the option provided for under that provision were allowed subsequently, according to Article 24(2)(b) of Directive 77/388/EEC ³ now recast as the first paragraph of Article 285 of the VAT Directive, to only exempt from VAT taxable persons whose annual turnover is no higher than EUR 5 000 or the equivalent in national currency. Pursuant to the second paragraph of Article 285 of the VAT Directive, those Member States may also grant graduated tax relief to taxable persons whose annual turnover exceeds the ceiling fixed by them for its application.

Until the end of 2012, Luxembourg exempted from VAT taxable persons whose annual turnover was no higher than EUR 10 000. In parallel, Luxembourg made use of the option pursuant to the second paragraph of Article 285 of the VAT Directive by granting graduated tax relief to taxable persons whose annual turnover was between EUR 10 000 and EUR 25 000.

Subsequently, Luxembourg requested and obtained a derogation pursuant to the first paragraph of Article 285 to apply a turnover threshold of EUR 25 000 as regards the exemption scheme for small businesses whilst at the same time abolishing the application of the graduated tax relief. Council Implementing Decision 2013/677/EU ⁴ authorised Luxembourg to apply the special measure mentioned above until 31 December 2016.

By Council Implementing Decision (EU) 2017/319 ⁵ Luxembourg was authorised to extend the expiry date of the special measure to 31 December 2019 and, at the same time, increase the threshold from EUR 25 000 to EUR 30 000. Then, by Council Implementing Decision (EU) 2019/2210 ⁶ , the expiry date was further extended to 31 December 2022 and the threshold increased from EUR 30 000 to EUR 35 000.

Luxembourg requested another extension of that measure for a limited period. Luxembourg indicated that the special measure reduces administrative burden for both taxable persons and the tax authority. It therefore contributes to the simplification of tax collection, as set out in Article 395(1) of the VAT Directive. The measure is and will remain fully optional for taxable persons.

According to Luxembourg, the special measure pursued would only have a negligible effect on the overall amount of VAT revenue collected at the stage of final consumption (not more than 0,05%), as required by the second subparagraph of Article 395(1) of the VAT Directive. More specifically, Luxembourg reported that, in 2020, 633 taxable persons with a turnover between EUR 10 000 and EUR 35 000 made use of the exemption, representing 0,78% of all taxable persons.

The special measure, simplifying the obligations of small operators, is in line with the objectives set out by the European Union for small businesses.

Given the positive impact on the reduction of administrative burden for businesses and the tax administration without a major impact on the total VAT revenue, it is appropriate to authorise Luxembourg to extend the special measure until 31 December 2024.

• Consistency with existing policy provisions in the policy area

The derogating measure is in line with the objectives of Directive (EU) 2020/285 amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises ⁷ , which resulted from the VAT action plan ⁸ , and aims to create a modern, simplified scheme for those businesses. In particular, it seeks to reduce VAT compliance costs and distortions of competition both domestically and at EU level, reduce the negative impact of the threshold effect, and facilitate business compliance as well as monitoring by tax administrations.

Moreover, the threshold of EUR 35 000 is consistent with Directive (EU) 2020/285, insofar as it allows Member States to set the annual turnover threshold required for an exemption from VAT at a level no higher than EUR 85 000 (or the equivalent in national currency).

Similar derogations, exempting from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Articles 285 and 287 of the VAT Directive, have been granted to other Member States. The Netherlands ⁹ and Belgium ¹⁰ have been granted a threshold of EUR 25 000; Italy ¹¹ a threshold of EUR 30 000; Poland ¹² , Latvia ¹³ and Estonia ¹⁴ have been granted a threshold of EUR 40 000; Hungary ¹⁵ a threshold of EUR 48 000; Lithuania ¹⁶ a threshold of EUR 55 000; Croatia ¹⁷ a threshold of EUR 45 000; Malta ¹⁸ a threshold of EUR 30 000; Slovenia ¹⁹ a threshold of EUR 50 000; Czechia ²⁰ a threshold of EUR 85 000; and Romania ²¹ a threshold of EUR 88 500.

Derogations from the VAT Directive should always be limited in time so that their effects can be assessed. In addition, the inclusion of an expiry date of the special measure until 31 December 2024 is aligned with the requirements of Directive (EU) 2020/285. That directive provides for 1 January 2025 as the date on which Member States will have to apply the national provisions, which they are required to adopt, to comply with it.

The proposed measure is therefore consistent with the provisions of the VAT Directive.

• Consistency with other Union policies

The Commission has been consistently stressing the need for simpler rules for small enterprises. In this respect, the Commission adopted in March 2020 an SME Strategy for a sustainable and digital Europe ²² , where it committed to continue to work on reducing the burden on SMEs. The objective to reduce the regulatory burden for SMEs is one of the pillars of that strategy. This special measure is in line with such objectives, as far as fiscal rules are concerned. It is also consistent with the 2020 Action Plan on fair and simple taxation supporting the recovery strategy ²³ , which acknowledges that tax compliance costs remain high in the EU, and that compliance costs are typically substantially higher for small than for large companies.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

Article 395 of the VAT Directive.

• Subsidiarity (for non-exclusive competence)

Considering the provision of the VAT Directive on which it is based, the proposal falls under the exclusive competence of the European Union. Hence, the subsidiarity principle does not apply.

• Proportionality

The Decision concerns an authorisation granted to a Member State upon its own request and does not constitute any obligation.

Given the limited scope of the derogation, the special measure is proportionate to the aim pursued, i.e. to simplify the tax collection for small taxable persons and for the tax administration.

• Choice of the instrument

The instrument proposed is a Council Implementing Decision.

Under Article 395 of the VAT Directive, a derogation from the common VAT rules is only possible upon authorisation by the Council, which is acting unanimously on a proposal from the Commission. A Council Implementing Decision is the most suitable instrument since it can be addressed to an individual Member State.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Stakeholder consultations

No stakeholder consultation has been conducted. The present proposal is based on a request made by Luxembourg and concerns only this particular Member State.

• Impact assessment

The proposal for a Council Implementing Decision aims at continuing for another two years a simplification measure which removes many of the VAT obligations for businesses operating with an annual turnover no higher than EUR 35 000 and therefore has a positive impact on the reduction of administrative burden for businesses and tax administration without a major impact on the total VAT revenue. Because of the narrow scope of the derogation and its limited application in time, the impact of the measure will in any case be limited.

The derogating measure will be optional for taxable persons. Taxable persons will be able to opt for the regular VAT arrangements in accordance with Article 290 of Directive 2006/112/EC.

• Fundamental rights

The proposal does not have any consequences for the protection of fundamental rights.

4. BUDGETARY IMPLICATIONS

Following entering into force of Council Regulation (EU, Euratom) 2021/769 of 30 April 2021 amending Regulation (EEC, Euratom) No 1553/89 on the definitive uniform arrangements for the collection of own resources accruing from value added tax ²⁴ , there will be no compensation calculation carried out by Luxembourg as of VAT own resource statement for the financial year 2021 onwards.