Luxembourg as a distribution hub: opportunities for the logistics sector in Luxembourg from an indirect tax perspective

As companies try to reduce the cost of inventory and shorten delivery times, they will often introduce distribution hubs ¹ in the supply chain, which they will want to locate close to their clients.
The geographical position of Luxembourg, its infrastructure, its multilingual workforce and the collaborative approach of the Luxembourg government give the country a competitive edge for this type of activity even if land is scarce and therefore generally more costly than in neighboring countries.
One of the key factors contributing to a country’s attractiveness is its legal and tax environment.
Countries which are recognized leaders in logistics, such as Belgium and the Netherlands, are well aware of the importance of flexible VAT and customs rules for the development of the sector. What is less well known is that the Luxembourg VAT system is particularly advantageous to logistics companies, making Luxembourg a preferred location for a European hub. It has been one of the factors enabling the Luxembourg airport to become the fifth largest cargo handler by tonnage in Europe.

A competitive VAT environment

Pre-financing optimization
In principle, importing goods into the European Union (EU) generates a VAT liability in the country of importation. Most EU countries ask for a direct payment of the VAT upon importation or require specific procedures to defer its payment. In Luxembourg, the VAT on importation is dealt with in the VAT return and no cash payment of import VAT is incurred. This can result in a significant pre-financing advantage. Moreover, due to the comparatively small size of the local market, distribution hubs located in the Grand Duchy mainly purchase and sell their goods outside the country. Consequently, their purchases and sales will be mostly free of VAT.

VAT representation
As at January 1, 2008 Luxembourg readopted the system of tax representation for VAT purposes. Under this system, a foreign entrepreneur can appoint a third party logistics services provider in Luxembourg to carry out the necessary VAT formalities and to pay the VAT due in Luxembourg on its behalf. As a result, a foreign trader who did not register for VAT in Luxembourg is able to import its goods in Luxembourg and distribute them from Luxembourg without having to obtain its own individual VAT identification number. This can help facilitate the management of its VAT obligations and compliance. The re-introduction of the system therefore contributes to the improvement of Luxembourg’s competitive positioning as a preferred point of entry and distribution in Europe and creates opportunities for logistics services providers.

Scope of right to deduction of VAT paid on expenses
Most EU Member States have implemented restrictions on the recovery of VAT on certain expenses (cars, accommodation). In Luxembourg, no specific restrictions exist except those related to expenditure on luxury items.

Customs developments

The Luxembourg customs authorities know that an efficient and flexible approach is instrumental in attracting logistics activities. The Luxembourg e-government and paperless customs initiatives should address the needs of the logistics sector whilst ensuring that the authorities are able to control these businesses. Moreover, the recently adopted modernized Community Customs Code and the European decision on ‘electronic customs’ should facilitate enhanced pan-European centralization of customs-related tasks. This should create an opportunity for Luxembourg to position itself as the central hub for logistics planning, management and administration (including VAT and customs compliance), even where the physical flows of goods take place outside the country.

Conclusion

The Grand Duchy’s VAT and customs framework contributes to the country’s competitiveness for logistics activities in Europe. In the future and taking into consideration European developments, it would appear that the main challenge will be to ensure that the required guidance, tools and trained officers are available and that opportunities are communicated timely and effectively.

¹ A distribution hub refers to a central point from which finished or semi-finished goods are distributed to customers (be it other enterprises or end-consumers) and where value-added logistics activities are usually performed. These can include physical work on goods such as assembly, (re)packing and labeling, but also ‘intellectual’ tasks such as planning and management of the supply chain, invoicing and tax (VAT and customs) compliance.