Luxembourg: E-Commerce

Luxembourg's economic policy encourages information technology operations. There are already a number of Internet Service Providers in Luxembourg, but the development of interest in e-commerce is patchy.

In November 2007 Luxembourg continued to hold up an agreement between European Union finance ministers on reforms to the charging of VAT on certain services traded within the EU.

At issue was a proposed change in the VAT charging rules that would mean consumers who buy items from e-commerce firms would pay VAT at the rate of the country in which they are resident, instead of the rate charged in the jurisdiction where the vendor is registered.

VAT in Luxembourg is charged at 15% - the lowest rate permitted in the EU - and the current rules have led dozens of major e-commerce firms such as eBay, Skype and iTunes to set up in the jurisdiction. But if the new VAT system were to be put in place, the Luxembourg government would stand to lose an estimated EUR220 million (US$320 million) annually in tax revenues.

The European Council of Finance Ministers (Ecofin) reached a landmark political agreement in December 2007 on two draft directives and a draft regulation aimed at changing the rules on value-added taxation intended to ensure that VAT on services accrues to the country where consumption occurs, and to prevent distortions of competition between member states operating different VAT rates.

The agreement ended a five-year deadlock on the sweeping changes to the community's VAT laws, but the reverse charging of VAT on the purchases of goods and services electronically will not begin until 2015, with a revenue sharing agreement phased in over the subsequent three years. This has appeased Luxembourg, which used its veto to block the proposed reforms.

See below for specific information on e-commerce in Luxembourg, or go to Offshore-e-com.com for an extensive analysis of the commercial possibilities and the legal background.

Luxembourg Facilities

Telecommunications Providers(s)

Luxembourg's telecommunications market was liberalised in 1998, but liberalisation has been slow and the incumbent, P&T Luxembourg (EPT), remains dominant. 3G was launched in 2003.

The main telecommunications companies have traditionally been P&T Luxembourg and Societe Europeenne de Communication SA (SEC).

Internet telecommunications company Skype is based in Luxembourg. Founded in 2002 by Niklas Zennström and Janus Friis, Skype offers high-quality voice communications to anyone with an Internet connection anywhere in the world.

In September, 2005, eBay agreed to acquire Skype for approximately US$2.6 billion in up-front cash and eBay stock, plus potential performance-based consideration. Microsoft acquired Skype in May, 2011 for USD8.5 billion from the investor group Silver Lake which had bought the company in 2009.

In November 2006 in a letter sent to the telecom regulator of Luxembourg, Institut Luxembourgeois de Régulation, the European Commission welcomed a regulatory measure proposed by ILR at the end of September designed to give new market entrants high-speed access to end-customers (or bit-stream access) via the broadband networks of Luxembourg’s telecom incumbent EPT (Entreprise des Postes et Télécommunications).

EPT is the only supplier in the relevant market, thus having 100% market share in the relevant wholesale market.

The remedies proposed by ILR required Luxembourg’s telecom incumbent to open its broadband networks to competitors by allowing them to purchase a high speed access link to the customer premises from EPT with transmission capacity for broadband data in both direction, thus enabling new entrants to offer their own, value-added services to end users.

The European Commission announced in July 2007 that it had closed an infringement procedure against Luxembourg, initiated as a result of the government's failure to comply with a Court of Justice judgement concerning the Luxembourg telecommunications markets.

In January 2007, the Commission asked Luxembourg to comply with a Court of Justice ruling of 12 June 2003, confirming that Luxembourg had failed to fully transpose Directive 90/388/CEE on competition in the markets for telecommunication services into national law.

Following the adoption of two regulations establishing transparent access conditions for new operators, the Commission considers that Luxembourg now complies with EU law.

ISP and Hosting Services; Connectivity

ISPs in Luxembourg have included Global Media Systems, Luxline Internet Services, Visual Online and Focus Internet Services.

Payment Processing and certification

There are three options for payment processing in Luxembourg. Some ISPs can accept an e-commerce company's payments through their own accounts, or those partnered with WorldPay, for example, can set up accounts with WorldPay for an e-commerce company. Finally, there is a DIY option for e-commerce businesses. Luxembourg-registered companies can use the online processing system launched in June 2000 by the Centre de Transferts Electroniques (Cetrel).

The natural bonding of the Internet and Offshore stems from the fact that both, of their nature, manage to avoid tax. Businesses which can operate on the Internet without, so to speak, touching ground in a high-tax jurisdiction will naturally migrate to offshore jurisdictions; while businesses that already have offshore existence will find it highly convenient to be able to use the Internet to trade with their high-tax customers without having to make a landing in their countries.

As a major offshore jurisdiction with many tens of thousands of offshore enterprises already installed, including many trading companies, it is only a matter of time before Luxembourg becomes a centre of e-commerce activity. The country's location in the heart of Europe, its good telecommunications links, sophisticated business infrastructure and the English-speaking, highly-educated work-force are all factors which will attract the sales, marketing and administrative departments of retail operations, particularly those trading into other EU countries.

In many countries, the distribution of goods from a warehousing facility does not constitute the carrying on of a trade or business in that jurisdiction, so that even for physical goods, in many case it will be possible to avoid a permanent establishment (taxable presence) altogether in many high-tax jurisdictions where trading activities currently take place.

To see an analysis of the current state of legal and tax issues surrounding offshore e-commerce, click here.

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Luxembourg Case Studies

This section will contain case studies of e-commerce solutions applied to offshore business activities carried out from Luxembourg. The case studies will be developed in association with partners. Contact us to learn more.

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