By judgement dated March 5th 2015 (the "Judgement"), the Court of Justice of the European Union (the "ECJ") ruled that the Grand-Duchy of Luxembourg had failed to fulfil its obligations under the Council Directive 2006/112/EC of November 28th 2006 on the common system of value added tax (the "VAT Directive") by applying its super reduced VAT rate of 3% to digital books.
The Commission had brought an action for infringement of EU Law before the ECJ. According to the Commission, the application of the super reduced rate was incompatible with the provisions of articles 96 to 99, 110 and 114 of the VAT Directive.
"The reduced VAT rate is applicable only to transactions consisting in the supply of a book on a physical medium."
Indeed, the ECJ followed the reasoning of the Commission by considering that the reduced VAT rate is applicable only to transactions consisting in the supply of a book on a physical medium. Even though, in order to be able to read an electronic book, physical support, such as a computer, is required, the ECJ noted that such support is not included in the supply of electronic books.
In addition, any provision regarding the application of reduced VAT rates is to be seen as an exception to the principle that Member States are to apply a standard rate of VAT to transactions subject to VAT and must therefore be interpreted strictly.
The ECJ finally concludes that the supply of electronic books has to be considered as an "electronically supplied service" within the meaning of article 98 (2) of the VAT Directive, as an electronic book cannot qualify as tangible property. Consequently, since the latter provision precludes the possibility of applying a reduced rate of VAT to such services, the Grand-Duchy of Luxembourg has failed to fulfil its obligations under the VAT Directive.
By circular letter n° 756bis dated March 16th 2015, the Luxembourg VAT authorities have confirmed that, as from May 1st 2015, the supply of e-books will be subject to the standard VAT rate of 17%. It has to be noted that, despite the recent increase from 15% to 17%, such standard VAT rate remains the lowest in Europe.
