Deductible VAT in Luxembourg: the right to deduct

In short. In Luxembourg, a VAT-registered business reclaims the VAT it pays on its purchases, the input VAT, on three conditions: holding a compliant invoice, using the expense for an activity that gives a right to deduct, and the tax having become chargeable. The deduction happens on the VAT return for the period: you pay over the output VAT on your sales minus the input VAT on your purchases. If input exceeds output, the balance is a VAT credit, carried forward or refunded. Three situations close or reduce this right: exempt activities with no right to deduct, private or out-of-scope use, and the small-business exemption scheme.

Most directors know they charge VAT. Many forget the other half of the mechanism: the VAT they pay their suppliers is not a cost, it is usually a claim on the State. You still have to meet the conditions, and know when the right to deduct does not apply. Here is how reclaiming VAT works in Luxembourg, what limits it, and how it shows up in your return.

What is deductible VAT, and who can reclaim it?

Deductible VAT, or input tax, is the VAT your business bears on its purchases of goods and services. The system rests on neutrality: a taxable person should not carry the weight of VAT on what it consumes to produce its own taxable transactions. It deducts that VAT, and pays over to the State only the difference with the VAT it has collected on its sales.

Any person carrying out an economic activity independently and on a regular basis, subject to VAT, can deduct. The core condition, set by the amended VAT law of 12 February 1979, is that the goods and services bought are necessary for the business and used for transactions that give a right to deduct. A private expense, or one used for an exempt activity with no right to deduct, is not recoverable.

The three conditions for reclaiming VAT on a purchase

A business purchase does not automatically give a right to deduct. Three conditions apply together.

1. A compliant invoice. The deduction rests on an invoice carrying every mandatory detail, starting with a correctly identified VAT amount and the supplier's identification number. An incomplete invoice, or a plain till receipt with no VAT shown, weakens the deduction in the event of an audit. The full list of required details is in our guide to mandatory invoice details in Luxembourg.
2. Use for a taxable activity. The good or service must serve your transactions subject to VAT, or certain exempt transactions that keep the right to deduct, such as exports and intra-Community supplies. If it serves an exempt activity with no right to deduct, the VAT stays your cost.
3. Tax that has become chargeable. You deduct the VAT on the return for the period in which it became chargeable, not before. That is why the date of an invoice matters as much as its amount.

What limits or closes the right to deduct

This is the part rarely worked out before signing off a purchase, and yet the one that makes the difference. Four situations reduce or remove the deduction.

Exempt transactions with no right to deduct. Some activities are VAT-exempt but, unlike exports, give no right to deduct on the related purchases. That is the case for part of financial, insurance and property-letting transactions. If your business carries out only this kind of transaction, it deducts nothing.

Private or out-of-scope use. VAT on an expense used outside the economic activity, or for private purposes, is not deductible. When a good serves both the business and private use, only the business share gives a right to deduct, and the private use must be handled properly. The vehicle is the textbook case: reclaiming the VAT depends on actual use and on the nature of the contract, and does not follow the French rules. We cover this, benefit in kind included, in our article on the company car in Luxembourg.

Foreign VAT. VAT paid in another Member State is not deducted on your Luxembourg return. It is reclaimed through the VAT refund procedure in the State where it was borne, which is a separate process.

The exemption scheme. A small business under the exemption scheme charges no VAT and, in return, deducts nothing: every euro of VAT paid to its suppliers becomes a definitive cost. That is the real hidden cost of the scheme, which we put numbers on in our guide to the VAT exemption threshold in Luxembourg.

Partial deduction: the pro rata for mixed taxable persons

Many businesses carry out both taxable transactions and exempt transactions with no right to deduct. They are then mixed taxable persons, and the deduction is neither full nor nil: it is partial.

The rule is the deductible proportion, or pro rata. The input VAT on expenses common to both activities is limited to a fraction, worked out as the ratio between the income that gives a right to deduct and the business's total income. A provider whose turnover gives a right to deduct for 70 % reclaims, in principle, 70 % of the VAT on its mixed costs. Some income, such as exempt grants or indemnities, is left out of the calculation.

This pro rata is provisional during the year, then adjusted on the final figures of the financial year. For capital goods, the adjustment runs over time: 10 years for buildings, 5 years for other capital assets. If the use of an asset shifts from a taxable activity to an exempt one, or the other way round, part of the VAT initially deducted can be clawed back or recovered year by year. It is a technical mechanism, but it avoids replaying everything at once.

How the deduction works in your return

The deduction is not a separate claim: it lives in your periodic VAT return. In each period, you enter the output VAT on your sales and the input VAT on your purchases, and you pay over only the difference. The formula fits on one line.

A VAT credit is common for a young company that invests before it invoices, or for an exporter. It is carried forward from one period to the next, or claimed as a refund, which is subject to a minimum amount and to the administration's review. The return itself is filed at the right frequency on the eCDF platform: we set out that calendar and how it works in our guide to VAT returns in Luxembourg.

This is where keeping the books in the same tool as your management makes the difference. When the input VAT is worked out from supplier invoices already recorded and correctly split by rate in the Odoo we configure, the return is no longer an end-of-quarter reconstruction: it is a read-out. And a forgotten input VAT is money left with the State for no reason.

Frequently asked questions

Which VAT can a business reclaim in Luxembourg?

The VAT paid on purchases of goods and services that are necessary for the business and used for transactions giving a right to deduct. You need a compliant invoice, use for a taxable activity, and tax that has become chargeable. VAT on private, out-of-scope or exempt-without-deduction expenses is not recoverable.

Can you reclaim VAT on a company car?

It depends on the actual use of the vehicle and on the nature of the contract. The right to deduct follows the use for the taxable activity, and private use must be handled separately. Luxembourg rules do not carry over the automatic cap applied in France: the case deserves a contract-by-contract analysis, above all where cross-border employees are involved.

What is the deductible proportion (pro rata)?

It is the fraction of input VAT a business can deduct when it carries out both taxable transactions and exempt transactions with no right to deduct. It equals the ratio between income giving a right to deduct and total income. The provisional pro rata for the year is adjusted on the final figures, and the adjustment on capital goods runs over 5 or 10 years.

What happens to a VAT credit?

When input VAT exceeds output VAT for a period, the excess is a VAT credit. It is carried forward to the next periods, or refunded on request, subject to a minimum amount and the administration's review.

Can you reclaim VAT paid abroad on your Luxembourg return?

No. VAT borne in another Member State is not deducted on the Luxembourg return. It is reclaimed through the VAT refund procedure in the Member State where it was paid.

Read more

• Accounting firm in Luxembourg: the complete guide for an SME
• VAT returns in Luxembourg: frequency, eCDF and deadlines
• The VAT exemption threshold in Luxembourg: 50,000 €
• The company car in Luxembourg: benefit in kind, VAT and Odoo Fleet
• The price of an accounting firm in Luxembourg: flat fee, hourly rates and hidden costs

Why Advena?

Input VAT is the kind of topic that plays out at data entry, not at year-end closing. An accounting firm that never touches your tool discovers your supplier invoices months later; an integrator that does not keep your books does not know which ones give a right to deduct. We do both in the same Odoo, configured for the PCN 2020 chart of accounts and Luxembourg VAT, with a fee announced up front from 325 € per month, all in. You reclaim what is reclaimable, at the right time, without re-keying it three times. The rules cited here come from Guichet.lu and the VAT law, consulted in October 2026; tax rules change, so check the official source before any binding decision.