Recharge of cost (VAT)

VAT treatment of recharge of costs: Key strategies and considerations

Managing the recharging of costs can be complex when it comes to VAT compliance.

In specific situations—such as explicit mandates ("débours") or within groups—it is important to differentiate which costs form part of the VAT taxable base and which do not.

This article provides an overview of the main VAT rules applicable to recharges, with a particular focus on “partial VAT taxpayers,” as well as the “restrictive regime for distinct activity sectors” (Article 51 LVL).

1. General framework: Recharge of costs and VAT taxable base

1.1 Commission vs. reimbursement

When a taxable payer acts under an explicit mandate, it purchases goods or services in the name and on behalf of the original purchaser (the company that has given the mandate).

In practice:

Commission: The agent’s commission is the remuneration for the service of acting as an intermediary.
- This commission is subject to VAT.
- In accounting terms, it is recognized as a revenue (commission income).
Expense reimbursement ("débours"): This refers to amounts paid by the agent on behalf of the principal (e.g., the purchase price of items).
- The exact reimbursed amounts are not part of the agent’s taxable base for VAT, as they do not represent the agent’s own economic activity but merely a pass-through of costs.
- These amounts typically pass through a clearing account in the Luxembourg Standard Chart of Accounts (PCN).

In practice, the agent’s invoice to its client often features two separate lines:

The commission (subject to VAT).
The expense reimbursement (not subject to the agent’s VAT, provided an explicit mandate can be demonstrated and the "débours" are properly justified).

1.2 Importance of an explicit mandate

To mitigate the risk of reclassification by the VAT Authorities (AED), it is absolutely necessary to clearly document the nature of the mandate.

This generally includes:

Having a written mandate agreement that clarifies the agent’s role and specifies how expenses will be reimbursed.
Clearly separating the commission (subject to VAT) from the reimbursed expenses (excluded from the VAT base) on the invoice.
Ensuring that purchase invoices are made out “in the name and on behalf” of the principal.

2. Corporate groups and the positive effects of recharge of costs

In corporate groups, it is common for a central entity (holding company, parent company, or a specialized subsidiary) to make purchases or incur expenses on behalf of other group companies.

A reimbursement strategy offers several advantages:

Transparency: A direct pass-through of the original expenses avoids artificially increasing the VAT taxable base.
Clear Invoicing: Internal invoices can distinctly show fees/commissions for services (subject to VAT) alongside recharged costs (outside the VAT base).

However, the VAT status of each group entity must be considered.

Some may be fully taxable businesses (with the right to deduct VAT on most expenses), while others—such as certain holding companies—may be partial VAT taxpayers, meaning they engage in both economic (VAT-relevant) and non-economic (out of scope) activities.

3. Partial VAT taxpayers and the impact on VAT deduction

3.1 Definitions: “Partial VAT taxpayer” and “mixed taxpayer”

Mixed VAT taxable person: An entity carrying out exclusively economic activities (taxable or exempt). Some operations might allow VAT recovery, while others do not. The taxpayer must calculate and apply a proportional deduction for VAT based on the nature of the activities (the “deduction coefficient”).
Partial VAT taxable person: Beyond its economic activities, the taxpayer also performs non-economic activities (outside the scope of VAT). VAT incurred on goods and services used for non-economic purposes is, in principle, non-recoverable.

Circular No. 765 has clarified and extended the rules originally intended for mixed taxpayers to partial taxpayers.

In essence:

When a partial taxpayer purchases goods and services for both its economic and non-economic activities, it must split VAT deduction based on how these goods and services are actually used.
Any portion used for non-economic activities is fully excluded from the right to deduct.

3.2 Consequences for recharging

When a partial VAT taxpayer recharges expenses to other companies, two situations arise:

Recharging of services (e.g., commissions, fees, management services): These are considered taxable economic operations (unless a specific exemption applies), and VAT is charged accordingly. If the recipient uses these services for its economic activity, it may deduct the VAT, subject to normal rules.
Expense reimbursement ("débours"): If the company is acting under an explicit mandate and the costs do not represent its expenses, these amounts fall outside the taxpayer’s VAT base. However, the VAT portion initially paid by the mandating entity may be non-deductible if those goods or services were partly used for the mandating entity’s non-economic activity.

4. The restrictive regime of “distinct activity sectors” (Article 51 LVL)

4.1 Overview

To alleviate some of the negative consequences that partial VAT status can have on holdings (due to limited VAT recovery from mixed or non-economic activities), Article 51 LVL allows taxpayers to opt for a regime of distinct activity sectors.

Concretely, this means:

Splitting the business into clearly separate sectors, each treated as an individual taxpayer for VAT purposes.
Segregating non-economic activities (or those with lower VAT recovery rates) so each sector has its own VAT accounting and potentially its own VAT return.

4.2 Conditions and prior authorization

Because this regime departs from the usual principle that the taxpayer is a single entity, the taxpayer must:

Obtain prior authorization from the AED (by submitting a detailed application justifying the division).
Maintain separate accounting systems for each sector to accurately track purchases, sales, and VAT declarations.
Strictly obey the rules set by the AED, who can refuse or revoke this regime if the conditions are no longer met.

4.3 Pros and cons

Advantages: Enhanced optimization of VAT deduction in genuinely economic sectors, preventing the non-economic part (or weakly taxable part) from diluting the overall deduction rate.
Disadvantages: Increased administrative burden, the need for strict separation of accounts, and closer scrutiny by the AED.

5. Conclusion

Developing a robust strategy for recharging expenses requires particular care in distinguishing:

Services (commissions, fees, etc.) that form part of the VAT taxable base.
Débours (reimbursements of costs) that do not necessarily serve as part of the VAT base³, provided an explicit mandate is clearly documented.

This distinction is especially important within corporate groups to prevent unnecessary tax charges or loss of VAT deductions. Holding companies or other entities that perform both economic and non-economic activities are considered partial VAT taxpayers and must follow specific rules—especially those outlined in Circular No. 765—to ensure they accurately allocate deductible VAT based on how goods and services are actually used.

In short, proper management of expense recharges and the selection of an appropriate VAT regime (for example, partial taxpayer status or distinct activity sectors) are pivotal for any business or group aiming to secure its operations and optimize its VAT position.

1. Amounts paid in the name and on behalf of the client—recorded as pass-through items—are not considered part of the remuneration under the Luxembourg VAT Law (LVL).
2. Article 51 LVL.
3. Article 30 LVL.