All about E-Commerce VAT: Distance sales, tangible goods, and electronic services
In Luxembourg, e-commerce VAT is governed by the amended law of February 12, 1979 on value added tax (“LVL”), which transposes European directives into national law, notably Directive 2006/112/EC and its subsequent amendments.
Distance sales of tangible goods (e.g., clothing, physical books, or electronic devices) are subject to the standard distance-selling regime provided for in Article 19quater LVL. This regime sets annual turnover thresholds beyond which the seller must register for VAT in the destination Member State (or opt to use the One-Stop Shop).
Electronic services (Articles 15 et seq. LVL) are subject to the “country of consumption” rule, and the applicable VAT rate is that of the Member State where the final consumer resides, in accordance with Article 17(2) LVL, which defines the place of supply.
It is therefore essential for any e-commerce business—whether it sells tangible goods or provides electronic services—to distinguish carefully between the specific rules governing distance sales and those applicable to intangible services, in order to comply with the obligations set out in the LVL and, in particular, with the European regulations on thresholds for the special distance-selling regime.
1. The case of “services supplied electronically.”
Under Directive 2006/112/EC, supplemented by Implementing Regulation (EU) No 282/2011, “electronically supplied services” (also known as “electronic services”) are defined as services predominantly delivered via the internet or an electronic network, and whose provision is essentially automated and requires little or no significant human intervention.
This includes, for example, website creation and hosting, as well as the remote maintenance of software or IT equipment (such as servers, routers, or database management systems). It also covers the sale or provision of software (through download or online updates), whether for professional applications (accounting, CRM, etc.) or personal use (photo editing software, antivirus programs, video games, etc.).
Moreover, the provision of images, videos, text, or the making available of databases clearly falls under these services if it is done via a platform or server accessible online (e.g., image banks, music or video streaming platforms, on-demand services, technical document consultation and downloading, etc.).
Streaming or downloading audiovisual content (music, movies, podcasts, webinars, sports or cultural event broadcasts) also comes under the scope of VAT on electronic services, as do distance learning (e-learning) services, whether they be open-access online courses, virtual classes, or continuing education modules.
The principle now in effect is that the VAT applicable to telecommunications, broadcasting, television, and e-commerce services (B2C) is that of the country where the final consumer resides.
However, it is crucial to distinguish these intangible services—provided entirely online—from the sales of tangible goods purchased online (paper books, printed plane tickets, etc.), which fall under the standard distance-selling regime and are subject to specific turnover thresholds in each Member State.
2. The case of tangible goods
According to Article 14 of Directive 2006/112/EC, the notion of selling tangible goods (or “supply of goods”) refers to the transfer of the right to dispose of tangible property as owner. In other words, it covers any physical product (e.g., clothing, paper books, electronic devices) whose ownership is transferred to the buyer.
In Luxembourg, Articles 9 et seq. LVL specify the application and taxation details for these sales. When a supply of goods takes place between a seller established in Luxembourg and a buyer (usually a private individual) located in another Member State, it is considered a distance sale. The seller must then check whether their annual turnover exceeds the EUR 10,000 threshold. Beyond this threshold, the business must register for VAT in the customer’s country or, since July 1, 2021, use the OSS (One-Stop Shop) for intra-EU sales of goods to declare and pay the VAT due.
Unlike electronic services, delivering tangible goods involves transport operations and potential customs clearance (in the case of imports from a non-EU country), which also affects the determination of the place of taxation and the calculation of duties and taxes.
Thus, for tangible goods, the physical aspect (the transfer of ownership of a tangible object) is the trigger for the taxable transaction, whereas for electronic services, the decisive factor is the online-based intangible service.
3. The One-Stop Shop (OSS)
To spare businesses from having to register and file VAT returns in each Member State where they make B2C sales, the European Union created a one-stop shop. Initially called MOSS (Mini One-Stop Shop) and limited to telecommunications, broadcasting, and electronic services, this facility has been expanded since July 1, 2021, under the name OSS (One-Stop Shop), to include, among other things, distance sales of goods within the EU.
How does the OSS work?
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Choice of the Member State of identification. The business registers for the one-stop shop in a single Member State (for example, Luxembourg if it has its head office or a stable establishment there).
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Single declaration for intra-Community sales. All B2C sales to final consumers in other Member States (whether electronic services or, since 2021, most distance sales of goods) are declared through this OSS portal.
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Collection and distribution of VAT. The tax authority of the Member State of identification collects the VAT declared by the business, then passes it on to the tax authorities of the relevant Member States of consumption.
Practical example
A company with its head office in Luxembourg can opt for the OSS in Luxembourg. This means it no longer needs to register for VAT in every Member State where its individual customers reside. However, it must apply the VAT rate in force in the country of consumption (the buyer’s country) and comply with local rules (rates, exemptions, etc.). All declarations are centralized via the OSS, which significantly simplifies administrative and tax obligations at the European level.
4. The IOSS (Import One-Stop Shop) regime
Since July 1, 2021, following the adoption of new Directives, the European Union has implemented the IOSS (Import One-Stop Shop) to simplify the declaration and collection of VAT on distance sales of goods imported from non-EU countries. This system applies only to shipments with an intrinsic value not exceeding EUR 150 (excluding transport and insurance costs).
How does the IOSS work?
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Registration for IOSS. E-commerce sellers or platforms importing low-value goods into the EU must register for IOSS in a single Member State (called the “Member State of identification”).
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Charging VAT at the time of sale. Once registered, sellers collect VAT directly from their customers at the time of purchase (rather than upon arrival of the goods in the EU). This spares consumers from having to pay customs clearance or additional VAT on delivery.
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Single monthly declaration. Each month, the seller submits a single VAT return via the IOSS portal of the Member State of identification (e.g., Luxembourg). This return covers all distance sales of imported goods to customers in different EU countries.
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Distribution of VAT among Member States. The tax authority of the Member State of identification collects the VAT and then remits it to the relevant EU countries.
Points to note
- EUR 150 shipment limit. Shipments exceeding an intrinsic value of EUR 150 are not eligible for the IOSS scheme and are subject to standard import rules (payment of VAT and possibly customs duties upon arrival).
- Drop-shipping and VAT registration. In the case of drop-shipping (sales of goods stored outside the EU and shipped directly to a consumer in the EU), if the shipment value exceeds EUR 150 or if the business chooses not to use IOSS, it must register for VAT in each Member State where it sells or appoint a fiscal representative to handle this, where permitted by the legislation of that State.
- Compliance with national rules. Even though IOSS provides a single point of contact for VAT on imports, each Member State has its own VAT rates and national regulations (reporting periods, audits, documentation requirements). Sellers must therefore ensure they comply with all applicable provisions to avoid administrative penalties.
Conclusion: does Luxembourg remain attractive?
Since January 1, 2015, Luxembourg’s standard VAT rate has been 17%, one of the lowest in the EU. However, this rate no longer applies systematically to all private customers in the Union, since the “place of consumption” rule takes precedence for B2C electronic services.
Despite this major shift, Luxembourg remains an attractive country for developing e-commerce activities, thanks in particular to:
- Its political and economic stability.
- Its One-Stop Shop (OSS), which simplifies VAT filing.
- An environment conducive to digital innovation and business development (corporate taxation, infrastructure, etc.).
Ultimately, even though the automatic advantage of Luxembourg’s VAT rate no longer applies as it once did for B2C sales, the Grand Duchy continues to offer a number of significant advantages for e-commerce, whether involving electronic services or the sale of tangible goods.
