A textbook case: a Franco-Luxembourg wedding
A couple organising their wedding in France, in close proximity to the Luxembourg border, engaged several service providers established in the Grand Duchy: a caterer, a wedding planner, a floral decorator, a DJ and a sound system provider. All of these professionals issued invoices to the future spouses (private individuals not subject to VAT) applying Luxembourg rates: 17 percent at the standard rate for services and 3 percent at the reduced rate for foodstuffs.
Although not a tax specialist, the client immediately noticed the anomaly: these services were physically performed in France, at a French reception venue, and should therefore logically have been subject to French VAT rates of 20 percent (standard rate) and 5.5 percent (reduced rate for on-site catering). This difference in rates represented a significant financial advantage for the client, but raised an obvious question of tax compliance.
This situation, far from being isolated, reveals a widespread practice among Luxembourg service providers regularly working with French or Belgian customers: the systematic application of Luxembourg VAT for administrative convenience, in disregard of European place-of-supply rules.
General place-of-supply rule for B2C services
Pursuant to Article 45 of the European VAT Directive 2006/112/EC, as transposed into Luxembourg and French law, services supplied to private individuals (customers not subject to VAT, referred to as “B2C”) are in principle taxable in the Member State where the supplier has established its place of business.
In practical terms, a company established in Luxembourg providing consulting, online training, graphic design or copywriting services to a French private individual normally charges Luxembourg VAT, without having to register in France or declare the transaction to the French tax authorities.
This general rule is based on a principle of administrative simplification: the supplier applies the VAT of its own country, avoiding the complications associated with multiple VAT registrations in several Member States. It greatly facilitates cross-border supplies of dematerialised or intellectual services.
Major exceptions: services linked to immovable property or a specific location
However, the general rule is subject to substantial exceptions set out in Article 47 of the VAT Directive, which require the application of the VAT of the country where the service is materially performed. These exceptions mainly concern services linked to immovable property or a specific geographical location.
Real estate services in a broad sense
The following services are considered to be linked to immovable property: rental of rooms, event spaces, marquees or temporary structures; architectural services; property valuation; supervision of immovable property; construction work; renovation, installation, maintenance or cleaning relating to an immovable property.
For all these services, the applicable VAT is that of the country where the property is located, regardless of the service provider’s place of establishment.
Event-related services and on-site catering
Cultural, artistic, sporting, scientific, educational, entertainment or similar services, as well as ancillary services related to them, are taxable in the Member State where those activities are materially carried out. This category notably includes:
– Event organisation (weddings, seminars, conferences), catering services with on-site service, DJs, musicians and entertainers physically performing at an event, rental and installation of sound, lighting and decoration equipment for an event, floral decoration services installed at a specific venue.
– The decisive criterion is the localised nature of the service: if the service requires a physical presence at a specific location or if its performance is inseparable from a particular geographical place, the VAT of the country where the event takes place applies mandatorily.
Application to the wedding case
In the Franco-Luxembourg wedding example, all the services ordered fell within this exception: the caterer provided on-site catering services in France, the wedding planner organised and coordinated the event physically in France, the decorator installed floral arrangements at the French reception venue, and the DJ and sound system provider performed physically in France during the reception.
None of these services could legally be invoiced with Luxembourg VAT. All had to be subject to French VAT at the respective rates of 20 percent (general services) and 5.5 percent (on-site catering).
Consequences of non-compliance with place-of-supply rules
Tax risks for the service provider
In the event of an audit or a report, the French tax authorities may carry out a VAT reassessment covering all services performed in France and incorrectly invoiced with Luxembourg VAT. The French tax administration (DGFiP) considers that Luxembourg VAT unduly charged does not constitute valid payment of the French VAT due.
The company therefore finds itself in a particularly unfavourable situation: it must pay the French VAT to the French authorities, including penalties and late-payment interest, without being able to offset the Luxembourg VAT already collected and paid in Luxembourg. The latter must be reclaimed from the Luxembourg tax authorities, a lengthy and complex procedure that ties up cash flow.
Retroactive VAT registration obligation
The French authorities may require the Luxembourg service provider to regularise its situation by registering for VAT in France and filing corrective VAT returns covering several years of activity. This regularisation entails significant administrative costs, advisory fees and exposure to in-depth tax audits.
Administrative cooperation between Member States
European tax authorities systematically exchange information on cross-border transactions via the VIES (VAT Information Exchange System) and the administrative cooperation mechanisms provided for by EU Regulation 904/2010. A tax audit in France may therefore trigger a notification to the Luxembourg authorities, resulting in a cross-check audit covering the company’s entire cross-border activity.
Commercial and reputational risks
A private customer informed of the tax irregularity may legitimately demand a compliant corrective invoice or request a partial refund corresponding to the VAT difference between Luxembourg and French rates. Beyond the immediate financial impact, the company risks damage to its professional reputation and a loss of customers.
Operational recommendations
Systematic identification of the place of performance
Before issuing any invoice, the company must precisely identify where the service will be materially performed. If the service involves a physical intervention in another Member State or is linked to immovable property located abroad, local VAT applies mandatorily.
Prior registration in the case of recurring activity
For Luxembourg companies regularly carrying out services localised in France or Belgium, VAT registration in the relevant Member State becomes essential. This administrative step allows correct invoicing from the outset and avoids any risk of subsequent reassessment.
Documentation and traceability
The company must retain precise documentation justifying the place of performance of each service: contracts stating the address of the intervention site, delivery notes, geolocated photographs, email exchanges with the client confirming the event location. This traceability facilitates audits and demonstrates the service provider’s good faith in the event of a dispute.
Conclusion
VAT place-of-supply rules for B2C services leave no room for approximation or creative interpretation. For Luxembourg companies providing event-related, catering, installation or any other location-specific services abroad, applying the VAT of the country of performance is a strict legal obligation, and non-compliance exposes them to heavy financial penalties.
The temptation to simplify matters by systematically applying Luxembourg VAT, while understandable from an administrative perspective, represents a major tax risk that any prudent business owner must avoid. In case of doubt regarding the applicable place-of-supply for a specific service, consulting an accountant before issuing the invoice is the only appropriate course of action.
