Why think Luxembourg for B2C e-Business Platform?

Avocats, Luxembourg / Lawyers, Luxembourg

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Non-EU Internet services providers offering services to EU individuals must register and account for EU value added tax (“VAT”). VAT will be charged to their customers at the rate of their country of residence ranging from 15% to 25%.

However, setting up a B2C sales company in Luxembourg can make non-EU providers benefit from the advantage of charging VAT to their EU customers at 15%, the lowest VAT rate in the EU.

As a result, to benefit from the competitive edge provided from a lower VAT rate, major US entities such as Amazon, AOL, Microsoft, Apple I-tunes have decided to establish their EU B2C e-business platform in Luxembourg.

In addition to being a prime location to establish investment funds, securitization vehicles, capital risk vehicles and holding (financial participation) companies, Luxembourg also offers excellent incentives from a tax perspective to establish and operate a B2C e-business company within the European Union.

Low VAT rate for on-line services

Pursuant to EU Directive 2002/38/EC of 7th may 2002 on e-commerce VAT[1] (the "Directive"), which should have been implemented in all EU Member States by 1 July 2003,

Non-EU businesses providing electronic services within the EU are subject to VAT in the country of residence of the beneficiary of the service (private individual or company). Thus, they will charge VAT to their customers at the rate applicable in the country of residence of the Customer.

Under the Directive non-EU businesses are required to register themselves, for VAT purposes, in only one EU country of their choice. This country will then pay to the country of residence of the buyer the VAT charged for each on-line transaction.

Alternatively, and this is where the real opportunity is, non-EU businesses may set up a sales company in an EU country. In such case, the service provider will charge VAT to its customers at the standard rate applicable in its country of establishment (ranging from 15% to 25%). However, if the buyer is a company not established in the same EU country as the seller or a company or an individual established outside the EU, applicable VAT is that of the country of residence of the buyer. Accordingly, the provider will invoice such clients free of VAT.

As Luxembourg's standard VAT rate is 15%, the lowest in the Europe (see Figure 2 below), non-EU companies, such as Amazon, AOL, Microsoft, Apple i-tunes increasingly decide to establish their EU sales platform in Luxembourg. Accordingly, they may charge VAT at a 15% rate to any private individual established in the EU for electronically delivered services.

Services targeted by the new regime comprise all electronically delivered services (such as web-hosting and maintenance, supply and maintenance of software and updates, supply of images, text and information, supply of music, films and games, distance teaching, etc.) but does not affect, for the time being, the delivery of physical goods.

To be considered as established in Luxembourg a company needs to have a minimum of substance in terms of human and technical resources. Hence, it would not be sufficient to create a corporate shell in Luxembourg which would be operated from outside of Luxembourg.

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