As a rule within the European Union, European private customers of e-services pay value added tax (VAT) at the rate of the country in which the EU service provider is based (although the rules will change in 2015, when they will pay the rate appplicable in the country in which they live). For such businesses, the lower the VAT rate, the higher the profitability ratio.

Luxembourg continues to reinforce its leading position in online commerce, thanks in particular to its favourable standard VAT rate of 15%. This leading position has now been strengthened by the new position of the Luxembourg tax authorities, which announced on December 12 2011 that e-books would benefit from the same reduced 3% VAT rate applicable to books from January 1 2012.

This change in position follows discussions held at EU level, resulting in the view that:

"similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the online and the physical environment is addressed."

The recent announcement from Luxembourg's Ministry for Finance comes shortly after the French government confirmed its application of a reduced VAT rate of 7% for e-books in France.

Luxembourg's decision to cut its VAT rate for e-books is likely to have a significant impact on the book trade by cutting the cost of e-books.

For further information on this topic please contact Bruno Gasparotto at Arendt & Medernach by telephone (+352 40 787 81), fax (+352 40 780 4) or email ([email protected]).