EU: ebooks infrigement procedure – second act

As you are probably aware, France and Luxembourg have on 1 January 2012 started to tax the sales of ebooks at reduced VAT rate instead of applying the standard VAT rate. This means that ebusinesses selling ebooks through a sales entity in Luxembourg were able to tax them at 3% rate instead of 15% and in France at 7% rate (5,5% as of 1 January 2013) instead of 19,6%.

The EU Commission in its role of the guardian of the EU Treaties and legislation does not agree with the unilateral decision of France and Luxembourg and has therefore initiated a formal infringement procedure and has in July 2012 send them a Letter of Formal Notice.

A very good and conveniently brief explanation on the infringement procedure and its implications can be found here.

Commission has on 24 October 2012 initiated the second step in the infringement procedure and issued Reasoned Opinions to France and Luxembourg. They have now one month time to bring their local VAT legislation in line with EU VAT legislation – i.e. to start taxing sales of ebooks at standard rate again. If they do not comply with the request of the Commission, the Commission will most probably bring them to the European Court of Justice, which will then pass its official and binding judgment whether Luxembourg and France are in breach of the EU VAT legislation.

The biggest question left is if this will matter at all with the new EU VAT B2C rules for eservices being implemented as of 1 January 2015. With only two years and two months left it is questionable if the infringement procedure will have any real consequences for the two countries. I hope however, that this case indicates the discrepancy of  theVAT treatment in ebooks and paper books to the EU Commission, which hopefully will also be considered in the ongoing public consultation on the reduced VAT rates.

Whatever the outcome of the infringement procedures will be, it is clear that the real winners are all the ebusinesses selling ebooks to EU based consumers as they can considerable (i.e. for the difference between the reduced and standard VAT rate) increase their profit margin or reduce their gross sales prices. According to the Commission this situation is creating a serious distortion of competition to the disadvantage of ebusiness in the 25 other EU countries.

What does this mean for you?

Regardeless of the result of the infringement procedure – France and Luxembourg based ebusiness are on the safe side and can legally apply the reduce VAT rates until France and Luxembourg amend their legislation. Whatever financial consequences (if any) France and Luxembourg will be facing this will not affect the ebusinesses (i.e. they cannot be penalized for following the local VAT law, which is more favorable than the EU legislation).