European Court of Justice: reduced VAT rate cannot be applied to supply of e-books

By Marie-Andrée Weiss

On March 5, 2015, the European Court of Justice (ECJ) held that France and Luxembourg have failed to fulfill their obligations under the Council Directive 2006/112/EC of November 28, 2006 on the common system of value added tax (the VAT Directive), because they had applied, since January 1, 2012 a reduced value added tax (VAT) rate to the supply of digital or electronic books (e-books). The two cases are C-479/13 and C-502/13.

Article 96 of the VAT Directive directs Member States to fix a standard VAT rate, which must be the same for the supply of goods and for the supply of services. Article 14(1) of the Directive defines “supply of goods” as “the transfer of the right to dispose of any tangible property as owner.” Article 24(1) of the Directive defines “supply of services” as “any transaction which does not constitute a supply of goods.”

Article 98 of the same Directive allows Member States to apply one or two reduced VAT rates, but only on the goods or services enumerated in Annex III of the Directive, a list which includes books in its point 6. Article 98(2) specifies, however, that these reduced rates cannot be applied to the services referred to in point (k) of Article 56(1) of the Directive, which lists some “electronically supplied services, such as those referred to in Annex II.” Annex II of the Directive is an list of the electronically supplied services referred to in point (k) of Article 56(1) and does not list the supply of books among these services, but the list is indicative, not exhaustive.

It should be noted that Directive 2009/47 of May 5, 2009, amending Directive 2006/112/EC as regards reduced rates of value added tax, states in its Recital 4 that the VAT Directive had to be amended “in order to clarify and update to technical progress the reference to books in its Annex III” and amends point 6 of Annex III as including “books on all physical means of support.”

While it is clear that EU law allows Member States to apply a reduced VAT rate to books, whether they can also apply a reduced VAT rate to e-books is less clear. If their sales are considered a sale of books on electronic support, Member States may apply a reduced VAT rate to the sale. However, if their sale is considered to be the supply of electronic services, then EU law prevents Member States to apply a reduced VAT rate to this service.

France took the position that it can apply a reduced VAT to e-books, as Article 278-a of its General Tax Code provides for a reduced 5.5% VAT rate on books, including e-books purchased by downloading them. Luxembourg also took the position that a reduced VAT rate should be applied to both books and e-books, noting in a Circular N0. 756 of December 12, 2011, that, while “there has not been a unanimous interpretation of the notion of “books” in the Member States…, the [Luxembourg] government has decided, for reasons of neutrality… that no distinction is to be made between physical formats and digital formats, where they are functionally identical” and decided to apply a ‘super-reduced’ VAT rate of 3% on e-books as of January 1, 2012.

The European Commission found France and Luxembourg’s position to be contrary to the VAT Directive, and sent France and Luxembourg letters of formal notice on July 4, 2012, then issued reasoned opinions on the matter on October 25, 2012, asking France and Luxembourg to comply with its requirements within one month of receipt. As the Commission was not satisfied with their answers, it commenced an infringement action under article 258 of the Treaty on the Functioning of the European Union, against both Member States, claiming that they had not fulfilled their obligations under EU law. Belgium was authorized to intervene in this action in support of France and of Luxembourg.

The Commission’s arguments

The Commission argued that applying a reduced VAT rate to the supply of e-books was not compatible with articles 96 and 98 of the VAT Directive, read in conjunction with its Annexes II and III, and Implementing Regulation No. 282/2011, article 7, which states that the “electronically supplied services,” which cannot benefit from a reduced VAT rate under the VAT Directive “include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.” Therefore, for the Commission, the reduced VAT rate cannot apply to the supply of e-books because, while Annex III lists books as goods to which a reduced VAT rate can be applied, e-books are out of the scope of article 98 of the Directive which allows Member States to apply a reduced rate to some goods and services.

France and Luxembourg’s arguments

France and Luxembourg argued instead, that, as point 6 of Annex III lists books, it therefore also covers the supply of e-books, and thus a reduced VAT rate can be applied to e-books. Indeed, article 96 of the VAT Directive provides that the VAT rate “shall be the same for the supply of goods and for the supply of services.” Article 98(1) of the Directive provides Member States with the right to apply a reduced rate, and Annex III lists in its point 6 books as goods which can be taxed at a lower rate.

Supplying e-books is a supply of goods, not a supply of services

The ECJ was not convinced by France and Luxembourg’s arguments. It reasoned that, while it is clear that point 6 of Annex III allows the supply of books on a physical medium to be taxable at a lower rate, it does not include in its scope the supply of electronic books. As this provision is an exception to the general principle that Member States must apply a standard VAT rate, it must therefore be interpreted strictly by the Court (C-479-13 at 30, citing its decision in Commission v. Spain C-360/11).

The ECJ noted that the EU legislature had excluded “electronically supplied services” from the scope of article 98(2) authorizing Member States to apply reduced VAT rates to some goods and services, and stated that “the supply of electronic books is an ‘electronically supplied service…’ within the meaning of… article 98(2)”(C-479/13at 34).

The ECJ further reasoned that article 24(1) of the VAT Directive defines supply of services as “any transaction which does not constitute a supply of goods.” While France argued that supplying e-books is not a “supply of goods” within the meaning of article 24(1), the ECJ stated that “the physical support enabling an electronic book to be read, which could quality as ‘tangible property’, is not part of that supply” and that, therefore, “the supply of electronic books must classified as a supply of services” (C-479/13 at 35).

The ECJ also noted that the supply of electronic books “clearly meets” article 7(1) of Implementing Regulation No 282/2011’s definition of “electronically supplied services,” noting that point 3 of Annex II, lists“ images, text and information and making available of databases” as electronically supplied goods which are made outside of the scope of article 98 by point k of article 56(1) of the VAT Directive.

As “the supply of electronic books is an electronically supplied service within the meaning of the second subparagraph of Article 98(2) of the VAT Directive,” Member States cannot apply to them a reduced VAT rate. For the court, point 6 of Annex III of the VAT Directive applies only to “a transaction consisting of the supply of a book on a physical medium. … Admittedly, in order to be able to read an electronic book, physical support, such as a computer, is required. However, such support is not included in the supply of electronic books” (C 502/13 at 35).

Luxembourg has announced it will apply a 17% VAT rate on e-books as of May 1, 2015. But in a joint declaration published on March 19, 2015, the ministers of culture of France, Germany, Italy and Poland ask the European Commission “to propose without delay an evolution in the European legislation to allow reduced tax rates of VAT for all books whether they are printed or digital.” More developments on the issue are thus expected to follow soon.