International tax advice

E-Commerce - VAT

Luxembourg's economic policy encourages electronic operations. There are already a number of Internet Service Providers in Luxembourg, but the rise of interest in e-commerce is constantly making it more attractive and efficient.

With its new law on electronic signatures, the lowest VAT rates in Europe, the ease of access to motorways and airports, the Grand-Duchy of Luxembourg has already attracted numerous companies (like A.O.L. Time Warner & AMAZON, microsoft,...) to establish their administrative headquarters on its territory, especially since the European Directive on E-commerce and VAT was introduced (see below).

E-commerce Business Activities

The natural convergence of the Internet and Business stems from the fact that both, by nature, aim to reduce taxation. Businesses migrate to jurisdictions like Luxembourg so they can operate via the Internet without being subject to high tax rates, while business that already exercise activities abroad find it very convenient to be able to use the Internet to trade with customers in high-tax countries, without having to set down goods in those countries.

By locating website servers in Luxembourg to obtain services previously based in high-tax jurisdictions, such as sales and marketing, treasury management, the supply of financial services, and most of all, the supply of digital goods, businesses can take advantage of low taxes for a growing number of operations.

Luxembourg’s position as a possible future e-commerce centre, is very attractive, given that it is a main 'low-tax' jurisdiction where tens of thousands of enterprises already exist, including many collective investment funds, banks and other financial institutions. Luxembourg certainly has the opportunity to become a centre for e-commerce. The country's geographical location, its good telecommunications links and its sophisticated business infrastructure further enhance its suitability.

E-Commerce and European VAT

On the 1st of January 2003, a new VAT regime for services provided by electronic means [came] into effect in Europe (EC Directive n°2002/38/CE of 7th May 2002).
The regime specifies that, for services provided by electronic means, VAT is due in the country of the Client if the client is not a resident of the EC (individual or professional), or if the client is a professional body established in the EC. This rule is also valid for Suppliers established outside of the EC when they are selling to individuals established within the EC.

The table below is a summary of the situation under Luxembourg legislation :

 
Individual Client
Professional Client
 
establ. in C.E.
Not establ. in C.E.
establ. in C.E.
Not establ. in C.E.
Luxembourg VAT-registered Supplier
VAT in Lux.(1)
0%
0%
0%
Supplier established outside the EC
VAT of the country (2)
0%
0%
0%

It is of course important for (1) & (2). Indeed, with this new EC Directive, the Grand-Duchy of Luxembourg has become an attractive place to set up a company to provide electronic services. These services, when provided to individuals established in the EC (25 member countries for +/- 455 million inhabitants) will be taxable in Luxembourg only, at attractive VAT rates – the lowest in the whole European Community (0, 3, 6, 12 & 15%).

Suppliers and other providers not registered in the EC will have to be registered in the European country of their choice and will have to pay the VAT applicable to each client, depending on the country where they are established (without any right to deduction on the costs).

Case Studies

List of Services considered to be provided by electronic means by the EC Directive:

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