EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter ‘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 26 September 2016, Luxembourg requested an authorisation to continue to exempt from VAT taxable persons whose annual turnover is below a certain threshold and to increase this threshold up from EUR 25 000 to EUR 30 000. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 4 October 2016 of the request made by Luxembourg. By letter dated 5 October 2016, the Commission notified Luxembourg 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 a taxable person does not have to charge VAT on his supplies and, consequently, he or she cannot deduct the VAT on his or her inputs.

This measure was first introduced in accordance with the provisions of Article 14 of Council Directive 67/228/EEC. However, those Member States which did not make use of the option provided for under that provision could subsequently, according to Article 24(2)(b) of Directive 77/388/EEC now recast as the first paragraph of Article 285 of the VAT Directive, only exempt taxable persons from VAT 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. Furthermore, Luxembourg informed the Commission that it made use of the option pursuant to the second paragraph of Article 285 of Directive 2006/112/EC by granting graduated tax relief to taxable persons whose annual turnover was between EUR 10 000 and EUR 25 000.

The application of the increased exemption threshold was appropriate to simplify the VAT system for small enterprises by significantly reducing the burdens on those businesses eligible for the scheme by releasing them from many of the VAT obligations under the normal VAT arrangements So Luxembourg requested and obtained a derogation 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.

This derogation was authorised by Council Decision 2013/677/EU until 31 December 2016.

In order to maintain its value in real terms and, therefore, the full benefit of its simplifying effect in time, Luxembourg is also seeking permission to revise the current threshold upwards in accordance with an indexing system.

Therefore, Luxembourg has now requested that the measure be extended as of 1 January 2017 and in addition, that the maximum authorised exemption threshold would be increased up to EUR 30 000 of annual turnover.

According to the Luxembourg authorities, in line with Article 395(1) second subparagraph of the VAT Directive, 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 0.12%). Via this demand, Luxembourg wants to simplify the burden on business as well as to stimulate the development of such small businesses. At the same time, Luxembourg wants to reduce the burden on the tax administration, by limiting the need to control small taxable persons, which is relatively costly in comparison to the amount of VAT at stake, and to strengthen its control activities towards larger taxable persons. That is in accordance with Article 395(1) first subparagraph of the VAT Directive which states that Member States may be authorised to introduce special measures for derogation from the provisions of the VAT Directive in order to simplify the procedure for collecting VAT.

In this context, it is to be noted that the measure is and will remain optional for taxable persons.

Luxembourg did not mention a deadline for this derogation. However, derogations from the VAT Directive should always be limited in time so that their effects can be assessed. Moreover, the provisions of Articles 281 to 294 of the VAT on special scheme for small enterprises are currently subject to review. As announced in the VAT Action Plan, the Commission's proposal in the form of a comprehensive simplification package, including a Directive, amending the provisions of the VAT Directive on a special scheme for small enterprises, is due to be presented by the end of 2017.

It is therefore proposed to extend the derogation for another period until the earliest of 31 December 2019 or the entry into force of a Directive amending the provisions of the VAT Directive on a special scheme for small enterprises. It is within the discretion of the Luxembourgish authorities to decide to what extent and whether or not to use an indexation system, in respect of the derogation applying up to EUR 30 000.

•Consistency with existing policy provisions in the policy area

Similar derogations have been granted to other Member States. Belgium was granted a threshold of EUR 25 000, Poland a threshold of EUR 30 000, Lithuaniaa threshold of EUR 45 000, Latviaand Sloveniaa threshold of EUR 50 000, Italy and Romaniaa threshold of EUR 65 000.

•Consistency with other Union policies