EU: What is the correct VAT rate for e-books?

The Luxembourg VAT Authorities have issued a Circular stating that no distinction should be made between books on physical and electronic means, meaning that the super-reduced 3% rate already applicable to books should also apply to e-books. The Circular is effective as of 1.1.2012 (read more). It seems to us that Luxembourg has adopted this position as a response to France’s recent decision to adopt the reduced rate of 7% for e-books published by companies based in France (read more), even though Luxembourg officials claim that it is based on the content of the “Green paper” on future of the EU VAT system, which is actually aiming to plot the  future of the EU VAT system (and not current VAT legislation).

Although this position is not compliant with the current position of the European Parliament (read more), this does already allow all Luxembourg-based businesses to benefit from the lowest VAT rate for e-books in Europe – at least as long as the ECJ does not rule otherwise (this might take a couple of years – probably beyond 2015) or Luxembourg does not change its opinion under the pressure of other EU countries and the European Commission.

The official position of the EU is that publishing and downloading e-books constitutes an electronically supplied service and should be taxed at standard rate (as all other electronically supplied services). In case of Luxembourg this would mean that e-books would be taxed at 15%. Luxembourg has the lowest standard VAT rate among all EU countries and is therefore frequently chosen as a country from where various international companies sell their e-services to all their EU (private) customers (i.e. B2C).

As soon as France announced that it will adopt a new position and charge e-books at the reduced rate of 7% as of 1.1.2012 Luxembourg was faced with the risk that some of its biggest resident companies (e.g. Amazon Sarl) may consider establishing a company in France and sell the e-books from France instead out of Luxembourg.

What we have witnessed here feels almost like a “VAT rate war” (more like a skirmish, really) between the various EU countries. It will be interesting to see, if UK will also join this “movement” – the UK has applied a 0% rate on sales of books.

What does this mean for you?

Basically, nothing much changed – Luxembourg is still the most beneficial country for EU e-book sellers, therefore no restructuring is required if your company is already selling e-books to private customers within the EU (B2C). The big difference is of course the applicable VAT rate – 15% until 31.12.2011 and 3% as of 1.1.2012. This means a noticeable saving for customers or increase in profit margin for the seller (depending if the sales price is declared as exclusive or inclusive of VAT).

Of course you will need to take care of the standard issues: e.g. sales made in 2011 and deliveries made in 2012 etc.

Least but not last: If your company is not selling e-books to EU private customers from Luxembourg you might be interested to consider this now – with the super low rates available as of 1.1.2012 the e-book business was never so (VAT) lucrative as today.