Taxation of income generated by e-commerce

E-commerce (electronic commerce) are commercial transactions that are carried out through electronic distribution channels.

Every order placed electronically falls under e-commerce and is deemed to be:

  • pure or online e-commerce if the delivery of the product or service is carried out via electronic channels (e.g.: downloading);
  • partial or offline e-commerce if the delivery is carried out via traditional channels (e.g.: delivery by post).

E-commerce often has an international dimension. The income generated is subject to a special taxation.

Who is concerned

A business which offers goods or services through electronic distribution channels is liable for income tax on e-commerce.

How to proceed

Classification of income

Businesses must state their income derived from e-commerce so that the Luxembourg Inland Revenue (Administration des contributions directes, ACD) can apply the appropriate tax treatment.

Profits

One speaks of profits if the income is generated from a sale or the provision of services such as:

  • electronic ordering of tangible goods;
  • electronic ordering and downloading on hard disc of digital products;
  • online technical assistance or consultation, etc.

Royalties

One speaks of royalties if the income is generated from the use or the right to use a copyright on a litterary, artistic or scientific work. The following transactions usually give rise to royalties:

  • electronic ordering or downloading of digital products with a view to their reproduction or modification for commercial purposes;
  • the online provision of a manufacturing process.

Example: purchase and delivery of a book via internet: it is a sale and the income generated is deemed to be a profit.

However, if the internet user has obtained the rights to reproduce a work in a predetermined number of digital copies or to modify the work for commercial purposes, the income generated by the transaction may be considered to be a royalty paid in return for the right to reproduce or modify the work purchased.

Taxation

Concept of tax residence

Taxation of income generated by e-commerce takes place:

  • for profits:
    • in the seller's (or service provider's) country of residence;
    • in the buyer's (client's) country of residence if the profits are generated by a permanent establishment of the business in the same country.
  • for royalties:

    • paid by individuals: in the country where the e-commerce establishment is located;

    • paid by professionals: withholding tax applied to Luxembourg businesses.

      If the professional is established abroad, the withholding tax may be levied at the time the Luxembourg income is taxed.

      The rate of withholding tax varies depending on the country concerned and is generally reduced under the terms of international tax agreements.

      The following table provides a basic overview of tax rates on royalties paid by professionals of these countries to a business established in Luxembourg. The applicable statutory tax rates in each country are compared with the agreed standard tax rates fixed in tax agreements between Luxembourg and each of the countries listed.

    Tax rate on royalties paid by Luxembourg businesses to professionals established abroad

     

    Statutory rate (%)

    Standard rate (%)

    Germany

    15.825

    5

    Austria

    20

    0 - 10

    Belgium

    15

    0

    Spain

    24

    10

    France

    33.33 - 50

    0

    Greece

    25

    5 - 7

    Hungary

    0 - 30

    0

    Ireland

    20

    0

    Italy

    22.50

    10

    Netherlands

    0

    0

    Poland

    20

    10

    Portugal

    15

    10

    Czech Republic

    15

    0 - 10

    United Kingdom

    20

    5

    USA

    30

    0

Taxation in Luxembourg

Income from e-commerce is taxable in Luxembourg if the business has established:

  • its tax residence, i.e.:
    • its main establishment where the business regroups its central administration (place of management or main accounting services, its archives, the place where general meetings are being held), or;
    • its registered office, provided said office is the effective place of management;
  • a permanent establishment (a simple website is not enough to constitute a permanent establishment).

The income taken into account as regards taxation in Luxembourg is:

  • for a business established in Luxembourg: its worldwide income. This is referred to as unlimited tax liability;
  • for a foreign business having a permanent establishment in Luxembourg: only the income generated by the permanent establishment. This is referred to as limited tax liability.

Who to contact

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