VAT input deduction in Luxembourg: the pro rata

How does VAT input deduction in Luxembourg work?

VAT input deduction in Luxembourg lets a taxable person set against the tax it owes the tax charged on its own purchases, to the extent that the goods and services are used for the purposes of its business. That is the wording of article 48 of the law of 12 February 1979.

The reservation matters as much as the principle. Article 48 opens the right "subject to the provisions of articles 49 to 54", and those six articles decide the amount actually recoverable: article 49 rules out tax attributed to exempt or out-of-scope transactions, article 50 installs the pro rata, article 51 direct attribution, article 52 the provisional pro rata, article 53 the adjustment of capital goods.

One limit comes before that mechanism: only Luxembourg VAT is deductible here. Tax borne in another member state is recovered from that state through its refund procedure. Likewise, for a building used partly for private purposes, article 48 restricts deduction to the proportion of use for the purposes of the business.

We regularly see files where input tax was deducted in full because the invoice carried the company's name, with no question of attribution ever put. The gap does not surface in the monthly return, which goes through: it surfaces on audit, increased by interest over several years. It is one of the first items we go through as a licensed accountant in Luxembourg.

What are the conditions for deducting input VAT?

Deducting input VAT in Luxembourg requires three conditions together: that the tax has become chargeable, that the taxable person holds an invoice drawn up in accordance with article 63 of the VAT law, and that it offsets the tax in the return for the period during which the right of deduction arose.

The date that counts is therefore chargeability, not payment. The right of deduction arises when the tax becomes chargeable, and deduction is made globally, by offset against the amount of tax due by the taxable person for a filing period. For an intra-Community acquisition the formal condition changes medium: the details of the transaction must appear on the periodic return.

The invoice is not a formality. The indirect tax portal lists its compulsory mentions: date of issue, a unique sequential number, the supplier's VAT identification number — the one VAT registration delivers —, the parties, the date of the supply, a description, the price excluding tax, and the VAT rates and amounts. Below 100 euros including tax they are lighter, but that relief does not apply to intra-Community transactions.

Where deductible tax exceeds the tax due, the surplus is carried forward or refunded on request above 1,200 euros; Guichet.lu contrasts a refund in principle monthly above that threshold with an annual refund below it. The right to a refund lapses five years after 31 December of the year concerned. That calendar is the one of your VAT returns.

Which VAT is not deductible in Luxembourg?

VAT is not deductible in Luxembourg where it has been charged on goods and services used for exempt transactions or transactions outside the scope of the tax, which article 49 provides, nor where it has been charged on expenditure of no strictly professional character, such as luxury, entertainment or representation expenditure, which article 54 provides.

The two exclusions do not overlap. Article 49 reasons on the destination of the expenditure: where goods and services serve both transactions giving rise to a right of deduction and other transactions, deduction is allowed only for the part proportional to the former. Article 54 reasons on the nature of the expenditure, and a grand-ducal regulation may exclude from deduction the goods capable of being used for the private purposes of the taxable person or of its staff.

A third exclusion is structural. A taxable person under the national exemption scheme is excluded from the right of deduction provided for in chapter VII of the law, and from the right to show VAT on the invoices it issues. The law of 20 December 2024, transposing directive (EU) 2020/285, raised the national threshold to 50,000 euros as from 1 January 2025, with a 10% tolerance that sets it in practice at 55,000 euros, and opened a cross-border scheme under a Union-wide ceiling of 100,000 euros.

What that threshold costs is set out in our article on the 50,000 euro VAT exemption. The perimeter finally matters as much as the nature of the expense: within a VAT group, the right of deduction is assessed at the level of the single taxable person and not member by member.

How is the general pro rata of deduction calculated?

The general pro rata of deduction in Luxembourg is one hundred times a fraction: annual turnover excluding tax that gives rise to a right of deduction, over that same figure increased by the turnover that gives rise to no such right. Article 50 requires it to be annual and rounded up.

The grand-ducal regulation of 21 December 1979 carries the detailed rules of that calculation, to which article 50 expressly refers. Two details there change the outcome. The pro rata is determined on an annual basis for all the transactions carried out by the taxable person, which rules out recalculating it item by item within the general pro rata itself. And it is rounded up to the next unit, so that a ratio of 87.2% gives 88%.

The same regulation opens a little-known waiver: no pro rata is applied where the percentage reaches at least ninety per cent and the amount of non-deductible tax is insignificant, a ceiling first expressed as ten thousand francs and replaced by two hundred and fifty euros on the changeover to the euro. The waiver operates without prejudice to article 51: it lightens the calculation, it does not stop the authority imposing another method.

Direct attribution or special pro rata: what does the authority expect?

Direct attribution is the method the Luxembourg authority favours where the right of deduction is partial: article 51 of the VAT law authorises it on request, allows the authority to impose it where the general pro rata creates inequalities, and opens special pro rata by sector of activity.

Circular no. 765 of 15 May 2013 draws the operational consequence. It notes that the general pro rata method often fails to meet the aim pursued by the law for mixed taxable persons, and calls for the allocation key most likely to produce a reliable result to be chosen for each cost item: headcount, floor area, transaction, or a pro rata specific to a sector. The general pro rata of article 50 is reserved there for residual overheads, those no other key can attach.

Circular no. 765-1 of 11 June 2018 extends the framework to partial taxable persons, and the distinction is worth holding: the 2013 circular covered only taxable persons carrying on solely an economic activity for VAT purposes, mixed in that part of that activity gives rise to a right of deduction, where a partial taxable person also carries on an activity outside the scope of the tax.

What we observe on engagements is that the method is rarely the problem: the documentation is. A key based on floor areas holds up where the layout plan and the actual use of the rooms are on file at the date of the deduction; reconstructed three years later to answer a request for information, the same key loses most of its force.

Provisional and definitive pro rata: how does the annual adjustment work?

The provisional pro rata for a year is determined in Luxembourg on the basis of the previous year's transactions, and the definitive pro rata is set at the beginning of the following year. It triggers an adjustment of the provisional deductions, made in the annual return of article 64, paragraph 7.

For a company starting up, the reference is missing by construction. The law then provides that the pro rata is provisionally estimated by the taxable person on the basis of its forecasts and under the supervision of the authority. It is a binding estimate: it sets the pace of recovery for the first year, and the gap against the outcome is settled in one go in the annual return.

Not every variation triggers an adjustment. The law waives adjustment where variations in the pro rata stay below ten points and non-adjustment causes no distortion of competition. Guichet.lu states the same threshold on the fixed-asset side, indicating that an adjustment is required if the rate of use varies by more than 10 points or if the amount of tax that an adjustment would produce exceeds 125 euros for the year concerned.

How is VAT on capital goods adjusted over five or ten years?

The adjustment of deductions initially made on capital goods runs in Luxembourg over a period of five years, including the year in which the goods were acquired or manufactured, and bears each year on one fifth only of the tax. For immovable capital goods the period is ten years, at one tenth a year.

The starting point shifts where the goods are not used from acquisition: the five or ten year period is then counted from the beginning of the use of the goods. Guichet.lu illustrates the mechanism for movable goods, the amount to be adjusted corresponding to the tax deducted on acquisition multiplied by the number of years left to run, at one fifth a year.

For buildings, the grand-ducal regulation of 7 March 1980, consolidated as at 1 January 2025, adds a rule of its own. Where the use of a building is changed, the adjustment is made globally for the time left to run until the ten-year period expires, at one tenth per calendar year or fraction of a year. No adjustment is due where the resulting tax does not exceed one hundred and twenty-five euros for the building concerned.

A filing duty attaches to it, and that is what costs most when missed: on pain of forfeiture, the user must declare in writing to the authority, within one year, any change in the use of a building. A room taken back by the shareholder or a floor re-let under another regime are enough to start that period, whose consequences meet those we set out on VAT on housing and real estate.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (authorisation 10077274). Legal references, thresholds and periods verified on 15 October 2026 against the official sources below.

From the indirect tax portal, the coordinated text of the amended law of 12 February 1979 on value added tax as at 1 January 2026, for article 48 and its use for the purposes of the business subject to articles 49 to 54, for the right arising on chargeability and the global offset in the return for a period, for article 50 and the annual pro rata rounded up, for article 52 and the provisional pro rata based on the previous year, for article 53 and the five and ten year periods, and for article 54 and luxury, entertainment or representation expenditure;

the page on the compulsory content of invoices; the page on the refund of the input tax surplus; the page on the small-business exemption scheme, for the national threshold of 50,000 euros as from 1 January 2025, the 10% tolerance and the ceiling of 100,000 euros; circulars no. 765 of 15 May 2013 and no. 765-1 of 11 June 2018, for the most reliable allocation key per cost item, the general pro rata reserved for residual overheads and the extension to partial taxable persons.

From Legilux, the grand-ducal regulation of 21 December 1979, for the pro rata formula and the waiver from ninety per cent; the grand-ducal regulation of 7 March 1980 consolidated as at 1 January 2025, for the global adjustment, the floor of one hundred and twenty-five euros per building and the written declaration within one year on pain of forfeiture; the law of 20 December 2024 transposing directive (EU) 2020/285.

From Guichet.lu, the factsheet on the deduction of input VAT, for deduction being in principle definitive, the worked example on movable goods and the thresholds of 10 points and of 125 euros.

Four points could not be verified against an official source at that date. First the exact wording of article 49, paragraph 2, subparagraph 1, as replaced by the law of 20 December 2024: only fragments of it were read, so this article attaches no rule of its own to it. Next the amounts of 1,200 euros and 2.40 euros framing the refund of the surplus, found in earlier coordinated versions of article 55. Then the ceiling of two hundred and fifty euros for the pro rata waiver, the 1979 regulation not having been read line by line.

Finally the reach of the 125 euro threshold, which Guichet.lu relates to the year concerned and the 1980 regulation to the building in question. These points are verified against the coordinated text of the indirect tax portal, the consolidated versions of the two regulations on Legilux and the full text of the two circulars.

This article sets out the state of the law at the date of publication and does not constitute personalised tax advice: the deductible amount depends on the actual activity, on the supporting documents and on the attribution method applied, and an allocation key holds up only with the documentation that comes with it. Rates, thresholds and periods change, and any decision binding your structure should be verified at the date you rely on it. Report an error to contact@financialservices.lu: the correction is dated in the article.