France and Luxembourg lose VAT rate battle on e-books. Any impact on Italy?
France and Luxembourg have lost their battle to apply reduced value added tax (VAT) rates to the supply of e-books. Electronic books (‘e-books’) include digital and electronic books that are downloaded or streamed from a website, so as to they can be viewed on computers, smartphones or e-books readers.
On 5 March 2015, the Court of Justice of the European Union (‘the Court’) handed down judgments in Cases C-479/13, Commission v. French Republic, and C-502/13, Commission v. Grand Duchy of Luxembourg. It upheld that, by applying a reduced rate of VAT to the supply of e-books, France and Luxembourg have failed to fulfil their obligations under Council Directive 2006/112/EC (‘VAT Directive’). In other words, France and Luxembourg cannot apply to e-books a VAT rate lower than the VAT rate on paper books as they are not books supplied on other physical means of support for which a reduced VAT rate is allowed.
The underlying facts leading to the rulings at issue are the following. Since 1 January 2012, France applied a VAT rate of 5.5%, and Luxembourg a VAT rate of 3%, on e-books rather than the ordinary rates of 20% and 17% respectively. France and Luxembourg basically justified this choice by arguing that, as printed and digital format books are functionally identical items, no distinction is to be made between them.
In 2012 the European Commission (‘Commission’) took the view that the application of these reduced VAT rates to the supply of e-books contravened the VAT Directive. Consequently, the Commission asked the Court to declare that, by applying these reduced VAT rates to the supply of e-books, France and Luxembourg have failed to fulfil their obligations under the VAT Directive.
In its judgments of 5 March 2015 the Court upheld the Commission’s position.
The Court first pointed out that a reduced rate of VAT can be applied only on the basis of Annex III to the VAT Directive. Annex III lists a series of goods and services in respect of which the application of reduced VAT rate rather than the ordinary levy is exceptionally allowed. This Annex refers in particular to the ‘supply of books … on all physical means of support’. On this basis, the Court found that a reduced rate of VAT is permitted only to a transaction consisting of the supply of a book on a physical medium.
The Court admitted that a physical support (such as a computer or a e-reader) is required in order to read an e-book. It then observed that such support is not included in the supply of e-books. This means that Annex III does not include the supply of e-books within its scope.
In addition, the Court observed that the supply of e-books cannot be considered as a ‘supply of goods’ since an electronic book cannot qualify as ‘tangible property’. The Court qualified the supply of electronic books as ‘electronically supplied service’. Accordingly, the second subparagraph of Article 98(2) of the VAT Directive clearly prevents the possibility to apply a reduced rate of VAT being applied to ‘electronically supplied services’. The supply of e-books is therefore expressly excluded from the application of a reduced VAT rate.
In support of their law, France and Luxembourg argued that paper books or books on other physical medium, on the one hand, and e-books, on the other hand, meet identical needs from the point of view of consumers. In line with the principle of fiscal neutrality principle, goods meeting similar consumer needs should receive the same treatment for the purpose of VAT. The Court rejected this argument considering that the principle of fiscal neutrality cannot be used to extend the scope of reduced rates of VAT to the supply of e-books.
Therefore, the Court concluded that Luxembourg and France have failed to fulfil their obligations under the VAT Directive.
This recent judgment should be a warning for Italy. By means of Article 1, comma 667, of Law n. 190/2014, Italy has applied a reduced VAT rate of 4% to the supply of e-books.
Even if the Commission is planning a review of the VAT Directive (as the Commission’s spokesman declared before the rulings at issue) and changes concerning e-books cannot be excluded, the position Italy currently finds itself is delicate. Consideration should be given to modifying Law 190/2014 before the Commission initiates an infringement procedure as regards its failure to fulfil VAT Directive obligations on the same line as applied in the French and Luxembourg cases.
 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1), as amended by Council Directive 2010/88/EU of 7 December 2010.
 Article 98 of the VAT Directive reads as follows: “1. Member States may apply either one or two reduced rates. // 2. The reduced rates shall apply only to supplies of goods or services in the categories set out in Annex III. The reduced rates shall not apply to electronically supplied services. // 3. When applying the reduced rates provided for in paragraph 1 to categories of goods, Member States may use the Combined Nomenclature to establish the precise coverage of the category concerned.”
 The approach adopted by the Court as to the fiscal neutrality argument seems not to be in line with the findings in the recent ruling in Case C-219/13 K Oy of 11 September 2014. In K Oy, the Cort found that the first subparagraph of Article 98(2) of and Annex III to the VAT Directive does not preclude, provided that the principle of fiscal neutrality inherent in the common system of VAT is complied with, a national legislation under which books published in paper form are subject to a reduced rate of value added tax and books published on other physical supports such as CDs, CD-ROMs or USB keys are subject to the standard VAT rate. In other terms, a selective application of the reduced VAT rates to printed books only is not justified unless the printed books meet different needs for consumers as compared to books published on another physical medium such as CDs, CD-ROMs or USB keys or made available on e-readers.
 Article 1, comma 667, of Law 23 dicembre 2014, n. 190 , known as “Legge di Stabilità 2015”.