Taxation on e-commerce in Luxembourg

TAXATION ON E-COMMERCE IN LUXEMBOURG: THE QUESTION OF PERMANENT ESTABLISHMENT FOR COMPANIES THAT OPERATE WEBSITES.

E-commerce has been recognized as a sector of growth and is being encouraged by the political economy of Luxembourg. We have interviewed an expert to clarify the tax laws related to to e-commerce in Luxembourg, as well as other countries.

• According to international tax law, a company generally has a permanent establishment in a country in which it has an set place of business. Before tackling the question of e-commerce tax law in Luxembourg, we will look at the three aspects fundamental to determining permanent establishement.
• A place of business: a company with a minimally consistent infrastructure
• Established: meaning that the place of business has a certain degree of permanence. The mere presence of a stand at an exposition does not equate to a permanent establishment.
• Business: a company is designed to carry out business, meaning that it has commercial activities (and consequently generates revenue). A permanent infrastructure which is maintained in a country with the simple goal of collecting information, for example, does not mean permanent establishment. 

It is easy to determine if permanent establishment exists for companies carrying out traditional business or industrial activities (thanks to extensive international jurisprudence).

The same criteria that make it easy for traditional companies to determine if permanent establishment exists makes it more difficult for an e-commerce company to do the same. The digital nature of the business activity makes the task of identifying the permanent establishment for tax purposes more delicate.

In terms of VAT (Luxembourg e-commerce VAT), there are different rules as to the operation of companies which operate commercial websites1 (selling a product through the internet) compared to those operating service sites (selling services such as downloading files).

A – E-commerce companies in Luxembourg operating commercial websites

Companies operating commercial websites¹ sell their products online (for example www.amazon.fr) which sells the book “Précis de Droit Comptable”).

This case is easily the simplest to determine a permanent establishment, as these companies normally maintain a stock reserve. They have a purchasing or a logistics office with a location that can be characterized as a permanent establishment for tax purposes.

B – Luxembourg e-commerce companies operating service websites

Companies which operate websites offering services which include paying for information or downloads through the internet (for example www.legitech.lu which sells Luxembourg tax documentation).

Companies which offer this kind of service often have a very limited physical presence because nature of their activities and content is essentially digital.

Frequently, the most tangible proof of permanent establishment for these companies is the server on which the website is hosted.

The company operating the website may have its own servers. When a company possesses its own servers or rents them, the company is then considered to have a permanent establishment in the country in which the servers are located. This is true even if the company does not hire a staff to ensure the maintenance of the servers in that country (this clarification was added after a comment by the OECD);

On the other hand, the company operating the website may not have its own servers. In this case, the company operating the site has a “hosting contract” with a hosting service by the server. In this case, the servers do not constitute a permanent establishment for tax purposes. If there is no office (or other tangible), these companies are only taxable in the state where they are headquartered, on the condition that that country is also where the company is managed.

¹Commercial website : a commercial website (also called e-commerce or e-business site) is a website designed to sell products or goods. The products are described through images and descriptions, loaded into a virtual shopping cart, and paid through a secured pay service. Anyone can shop through this sort of website.