he New Year is almost upon us, and 2015 is slated to bring with it lots of changes to Luxembourg’s tax and banking environment. We will see the official end to banking secrecy, increases to VAT rates, an evolving e-commerce regime, as well as the remaining 8 of the 15 OECD recommendations for BEPS. As tax planners we have to be ready to handle these changes. We know that tax law is not written in stone; it’s constantly being revised to best fit the current economic, political, and social context. At this mid-point of 2015, the decade’s trend seems to be heading in a direction of substance, coherence and transparency on all fronts, including VAT.
A 2% increase to the Luxembourg Standard VAT rate will come into effect on 1 January 2015, bumping the current rate of 15% up to 17%. While this may appear to be bad news many countries have already increased their rates significantly over the past 5 years and are continuing to do so. Luxembourg is following a trend, and despite this increase, retains its status as the country with the lowest VAT rate in the European Union. Luxembourg’s reevaluated standard rate of 17% is a full ten points lower than Hungary, whose rate of 27% has the honor of being the highest in the EU.
VAT sets itself apart from Corporate Tax because the taxable base is the end consumer, and not corporations. When a corporation does not realize profits, the amount of taxes they are required to pay decreases, but a consumer will never escape his share of value added taxes at the point of purchase. This is why raising VAT rates is an easy way to increase treasury for the state. Luxembourg, a country with few debt concerns, can continue to provide the lowest rate in the Union to its consumers.
The next big news of 2015 comes from a shift in how we think about e-services. Starting 1 January 2015, a user in France who purchases a service via the internet will pay VAT corresponding to the French rate and not the VAT rate of the country where the e-commerce business is based..
Favorable VAT conditions have attracted some big names to Luxembourg. These e-commerce companies have real substance in the Grand Duchy and are far from just a simple sticker to be peeled off a letter box. We don’t expect them to be going anywhere soon. For many years now, Luxembourg has been intent on making a name for itself as an e-hub where companies can benefit from a state-of-the-art optic fiber connection, R&D subsidies, and a stable financial environment.
This leads me to my last point on the topic. If we look at the VAT revenues, the 200-300 million euros that will be collected through the increase of VAT will most certainly not compensate for the 800-900 million euro loss of VAT due to the e-commerce changes.
I therefore feel that scrutiny and audits by the tax authorities will increase, especially when it comes to the SOPARFI where the VAT may be registered in an incorrect country, or even not paid at all. All companies should therefore review their current VAT situations and some may even be pleasantly surprised to learn that they should be paying a lower rate in Luxembourg than a higher rate in another EU jurisdiction!
By Christophe Plainchamp