No reduced tax rate for e-books, top EU court rules

Most EU member states, with the exception of Bulgaria and Denmark, impose a lower rate of VAT on physical books than on other products and services. The lower rate for books is one of a limited number of exemptions allowed under the EU's VAT Directive.

In January 2012, France lowered the VAT rate on e-books to 5.5 percent, and Luxembourg to 3 percent, matching the rates they levied on paper books. The European Commission asked the Court of Justice of the European Union (CJEU) to rule that the move breached the VAT Directive.

The directive only allows reduced VAT to be applied to books on a physical medium, so the case turned on what the court considered to be a physical medium.

Last year, the CJEU ruled that reduced-rate VAT may be charged on e-books sold on a CD or USB stick, as those are physical mediums.

However, while an e-book delivered over the Internet requires a physical support such as a smartphone, e-reader or computer in order to read it, this support is not included in the scope of the law, the Court ruled Thursday.

Moreover, it found that the VAT Directive excludes any possibility of a reduced VAT rate being applied to "electronically supplied services," adding that the supply of e-books by download or web streaming is such a service.

France and Luxembourg must now comply with the Court's judgement as quickly as possible, raising the VAT on e-books to the countries' full VAT rates of 20 percent and 17 percent, respectively.

The only way to reduce the VAT rate on e-books sold over the Internet would be for the European Commission to propose a change in the law, a spokesman for the court said.

The Commission is planning just that -- but not before next year, said its taxation and customs spokeswoman Vanessa Mock.

"The Commission appreciates that member states may want to define their own priorities, including on culture policy, in their taxation policy. This should be done within the EU legal framework. This is why the Commission will address this matter through the extensive overhaul of the VAT system which is currently being prepared. We hope to be able to communicate on this next year," she said.

Loek is Amsterdam Correspondent and covers online privacy, intellectual property, online payment issues as well as EU technology policy and regulation for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to loek_essers@idg.com