Luxembourg is currently probably the nicest place to establish an e-business sales entity in the EU (“e-hub”) and this will probably not change before y2015. This is due to several reasons:
- It has the lowest VAT rate for supply of digital services to EU consumers (B2C sales);
- It is generally possible to negotiate good corporate tax benefits with the Luxembourg tax authorities (tax holidays, special status, etc.);
- It has a very good network of double tax treaties allowing for effective tax optimization;
- Its tax authorities are “user friendly”, “business focused”, communicative and “solution oriented”;
- It has good business infrastructure and regulatory framework.
While there are other countries that can keep up with or even beat Luxembourg on the corporate tax and infrastructure side (e.g. Switzerland, Ireland, Malta), none can beat Luxembourg’s super low VAT rates for B2C sales of digital services to EU consumers (Swiss has 8% VAT rate, but this can be used only for sales to Swiss customers and not inside the EU).
When wishing to sell digital services to EU consumers non-EU e-businesses have to pass a thought decision (these rules apply to B2C sales of digital services only):
- They need to identify the country of residency of their EU consumers (and I mean country of residency as opposed to computer location, IP address, country of the bank that issues the credit card, location where the consumer claims to be, etc.) and charge VAT at the appropriate rate of that country (anything between 15% and 27%) and report and pay VAT correctly to the relevant tax authorities;
- They can choose to ignore this requirement and commit a tax fraud (not really an option for reputable companies, but probably something most of the smaller once still do these days and hope not to get caught).
There is also a third option available – to follow the rules for EU based e-businesses:
- They can establish an EU based sales company (“e-hub”) and sell all B2C digital services to EU consumers from there. They de facto become an EU based business, which brings them the advantage to use local VAT rate of that single EU country for all B2C sales of digital services to all EU consumers.
This brings us back to Luxemburg and the many e-businesses which choose it as a location for their regional e-hub / sales company. Luxembourg might be charging less VAT then other EU countries and provide good corporate tax deals, but the sheer volume of the trade “passing through” Luxembourg (and not other EU countries) enables this small EU country a very nice tax income.
Defending its No.1 position in the EU
Luxembourg is known to actively defend its No. 1 e-hub position in the EU. That’s perfectly logical – a big peace of economy and well being of this small country depends on it.
Luxembourg has in the recent past successfully postponed the attempts of all other 26 EU countries and EU Commission and EU Parliament to undermine its tax position. They tried to introduce the new B2C EU VAT rules in 2010 already, together with the rest of the “VAT package”. These rules would require from all EU e-business to follow the same rules already valid non-EU e-businesses for B2C supplies of digital services to EU consumers – i.e. to charge VAT in the country where the consumer is established.
Luxembourg has successfully postponed the implementation of the new rules for five years as they would effectively nullify its superb position as a hosting country for e-business. It is clear that Luxembourg will have to give in to the new rules on 1 January 2015, but this additional five years enabled Luxembourg to cement deals with existing e-businesses, attract new e-businesses and actively prepare for the post y2015 period.
Just recently (end of 2011) has Luxembourg successfully reacted to a new treat, this time initiated by France. France has decided to apply a reduce rate of 7% for supplies of e-books in order to underbid Luxembourg position. France was aware that it is acting on its own and against the wording of the EU VAT legislation and understood that its behavior might be challenged by other EU countries and the EU Commission. France culture minister Frédéric Mitterrand Gallimard communicated its government position that France is willing to pay any fines imposed by the European Commission.
Of course, it would most probably take the EU Commission years to follow up on this infringement and in the meantime France would attract the presence of all e-publishers in the EU – they would simply establish a sales company in France and sell e-books 8% cheaper than they would be able to do from Luxembourg.
Luxembourg reacted in the only logical way – it reduced the VAT rate for e-books from 15% to 3% (the same reduced rate as is used for “paper” books, claiming that EU intends to do this sometimes in the future anyway) and thereby secured its No.1 position as the preferred location for e-publishers in the EU.
Of course, Luxembourg is now facing the reaction of the rest of the EU countries and that of the EU Commission. So far no official reaction has been initiated and it might take well beyond y2015 before Luxembourg will be forced to reverse its decision. At that point in time this will not be important anymore as the new B2C EU VAT rules for digital services will be applied on 1 January 2015 making this issue irrelevant.
Either way, the e-publishers can enjoy the lower VAT rates strait away – if the EU Commission makes any steps against Luxembourg this will hit Luxembourg alone; the e-publishers cannot be fined for infringements conducted by Luxembourg and can relay on the fact that they are applying the prescribed VAT rate. Luxembourg’s government has obviously done its cost/benefit analysis and based on it decided what is the best for the country.
y2015 and beyond
Luxembourg’s position will no longer be unique after y2015 when the new B2C EU VAT rules will become effective. Luxembourg will have to face an international competition. By losing its unique VAT advantage it will have to provide even better corporate tax deals or rely on existing deals with the already established e-businesses. I assume at that Luxembourg’s tax authorities have been cunning enough to impose tax penalties to any e-business wishing to leave Luxembourg for another jurisdiction after 2014 (speculation: they have most probably implemented something in the way of an exit tax and/or included “retroactive cancellation of tax holidays benefits” clause in corporate tax agreements with e-businesses).
Luxemburg will most probably remain a very nice place for e-businesses also in the future and hope to retain existing and attract new businesses with good infrastructure, regulatory framework (e.g. IP protection) and of course “sweet deals”. It will have to face the competition from other countries willing to replace it as the No.1 e-gateway for Europe. I know Switzerland is already preparing to make this jump for y2015 and it is not the only country to do so.