Step by step: the subtleties of VAT in Luxembourg

Our article “Close-up on VAT and registration” gave you a solid basis to grasp what VAT means and how it works in the Grand Duchy of Luxembourg.

But what about VAT exemption? How does it apply? If you are in “distance sales” and/or service provision, I suspect you wouldn’t say no to an expert explaining just what “dropshipping” means…

With that, here goes our second article on a topic that, we must admit, is rather complex for common mortals… Luckily, qualified and invested experts are here to guide you through, step by step. In this article, we will be sharing some indispensable vocabulary for understanding VAT, and laying out the 5 most common transaction models and their VAT related implications.

If you haven’t read the article about VAT and registration, start here for a better understanding of the rest!

VAT exemption: why and how it works?

The VAT exemption regime applies to one specific case: people (companies and self-employed persons) whose annual pre-tax turnover in a calendar year does not surpass 35,000 euro[1]. If you are in this category, bear in mind that you can choose this regime as long as you opt to do so before your first tax return. Changing afterwards can lead to complications.

But be careful! VAT exemption does not exempt you from the initial registration formalities, as explained in our first article about VAT and the steps to filing your request for value added tax registration in Luxembourg.

Important points if you opt for VAT exemption

All entrepreneurs are still obliged to inform the administration of their turnover from the previous year. Consequently, they must file a simplified VAT return.

In addition, the exemption regime is only valid for local transactions. Taxable franchisees under exemption remain liable for VAT on purchases of products and/or services performed in other countries, and if they carry out services in another member state of the EU. If you’re doubting whether to choose the standard tax regime or VAT exemption, consider the territorial aspect of your transactions! You can find plenty of helpful information on guichet.lu.

The House of Entrepreneurship can also be reached via their hotline to help you along. If need be, their team’s experts can help you find answers to your questions.

Dropshipping: distance selling and service provision

A growing number of entrepreneurs are doing business over the internet, in an either purely or partially digitalized manner (with or without merchandise shipping). If you fall into this category, and to have a solid grasp of how VAT applies to distance or online sales, you need to be able to distinguish a few key concepts.

Key vocabulary

Here is a pocket lexicon of terms we recommend studying and memorizing:

Taxable person: anyone liable for VAT, meaning any person with a valid VAT number such as individuals, certain public bodies, associations, etc. with the exception of people under the exemption regime. In other words, “Any person who carries out transactions, independently and on a regular basis within the Grand Duchy of Luxembourg in connection with an economic activity, regardless of the purpose or results of the said activity and regardless of its location, is considered a taxable person for Luxembourg VAT.” (1)

Non-taxable person: any person or legal entity that is not liable for VAT. In other words, “Persons who do not carry out an activity under their own responsibility and do not benefit from complete liberty in the organization and execution of the concerned work are not subject to VAT.” (2) This applies to employees, for instance, as well as “people who do not exercise an economic activity in a recurring or permanent manner.”

Sales of goods with shipping: any sale of tangible goods (material objects) with shipping.

Service provision: all sales other than tangible goods. This includes selling videos and music through electronic means, as well as digital content, service provision, etc.

Local transaction: transaction carried out in Luxembourg.

Cross-community transaction: transaction carried out for a customer located in another member country of the EU.

Export: transaction performed with a customer located outside of the European Union.

The main transaction models

Now that these 7 essential terms are clear, we can summarize the most common transaction models and their VAT related implications.

Sale of goods with shipping to a taxable person

With this model, Luxembourg VAT applies to local transactions. However, cross-community transactions or exports are VAT-free (only when the goods physically exit the country of departure). (3)

Sale of goods with shipping to a non-taxable person

For local transactions, Luxembourg VAT is once again to be taken into account. For cross-community transactions, it’s the VAT from the country of departure that must be applied, up to the annual turnover threshold of €10,000. If that amount is exceeded, VAT from the customer’s country applies to the sale. For exports, there is no applicable VAT.

Provision of services to a taxable person

Logically enough, Luxembourg VAT applies to local transactions, and no VAT applies to cross-community transactions or exports. (4)

Provision of services to a non-taxable person

VAT from the country of the customer is to be applied (for instance, Luxembourg VAT applies to services provided and used in Luxembourg). The same rule applies when the service is provided by electronic means such as, for example, the sale of digital content, videos or music by electronic means and in the case of service provision (including training) be electronic means. No VAT applies to customers located outside of the EU. (5)

We have strived to simplify these explanations to our best ability and hope this article has been truly helpful. Should you wish to have assistance with your administrative procedures, be sure to contact the House of Entrepreneurship.

For more information:

(1) taxable person (link in French) / (2) Non-taxable person / (3) TVA et la vente de biens / (4) TVA et la prestation de services  / (5) TVA et les prestations en ligne

[1] Applicable threshold in 2021, subject to change