EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued added tax (‘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. 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 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 authorised Luxembourg to apply the special measure mentioned above until 31 December 2016. By Council Implementing Decision (EU) 2017/319 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, 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