Luxembourg, an eldorado for internet giants

In the late nineties, the government sensed that Luxembourg had the potential to become a preferred location for e-commerce. With the arrival of multinational corporations, the country is now world-renowned in the field of e-commerce. Let’s take a closer look at this success story that shows no signs of slowing down. iTunes, Amazon, PayPal or Skype, the online telephone service.

Within a few years, the Grand Duchy has become the new Eldorado for e-commerce giants. It all began in 1999 when AOL Europe Services settled in Luxembourg. A few years later, AOL added a "Network Operation Center" to its European headquarters. The centre manages and monitors the communication flow between Europe and the head office in the United States. Around the same time, Microsoft decided to reinforce its presence in Luxembourg by converting its branch, which opened there in 2002, into a fully independent subsidiary for online services.

European headquarters in Luxembourg

In July 2003, Amazon (the book, CD, DVD and video distributor) opened a branch in the Grand Duchy. Moreover, the US online commerce leader decided, in December of 2004, to open its European headquarters in Luxembourg. In his speech at the official opening of the branch, Diego Piacentinit, Amazon Senior Vice-President, emphasized the many assets offered by the Grand Duchy for “a company like ours”: location, social climate, and multilingualism.

In 2005, Apple opened iTunes Music Store in Luxembourg, its European platform for online music commerce. In May 2007, a new victory for the Luxembourg economy: the Ministers in charge of negotiations - Luc Frieden, Finance, and Jean-Louis Schiltz, Communication Technologies – announced that PayPal will settle in Luxembourg. The American company intends to operate all its European activities from Luxembourg. It has been granted a Luxembourg bank license to this effect.

PayPal is the world leader for online payment services. In 2007, PayPal had, according to its own release, 143 million user accounts and 11 billion dollars payment volume for the first quarter of 2007 alone. These figures illustrate the extent of online payment activities.

Purchased by the giant eBay

Finally, Skype, a company created in 2003, offers free calls between users and low-cost calls to third parties. In September 2005, the company was purchased by the giant eBay. Then, in September 2009, the group sold 65 % of its Skype subsidiary to a consortium of investors led by the Silver Lake Partners Fund for 1.9 billion dollars.

Since that time, Microsoft has made a move to buy Skype for the sum of 8.5 billion dollars.

With these multinational corporations, the Grand Duchy of Luxembourg has earned a valuable place on the ecommerce world map. It should be mentioned that, for the last decade, the government has implemented a consistent strategy favouring the growth of e-commerce.

“By combining an appropriate infrastructure, a qualified workforce, an attractive tax system, and specific measures in favour of e-commerce, Luxembourg has succeeded in becoming a centre for the development of e-commerce in Europe,” indicated a report to Greenwich Consulting commissioned by Jean Arthuis, President of the Finance commission of the French Senate.

It is important to note that over a hundred small or mid-size companies gravitate around the “major players” and offer numerous services to corporations and individuals.

The assets of Luxembourg

So, what is the recipe for success in Luxembourg? “This enthusiasm can be explained in part by an attractive fiscal environment, a business environment paving the way for the emergence of start-ups, and the existence of excellent technological infrastructures such as a reinforced high bandwidth connectivity, as well as the legal acknowledgement of electronic signature along with the creation of a certification authority who issues and manages certificates with a very high level of security”, explains the government on its website.

According to the Greenwich Consulting report, the main asset of Luxembourg is its high quality high bandwidth Internet network. All households have access to ADSL: according to Eurostat, 61% of the households had high bandwidth access in 2008.

In 2005, the Luxembourg State and several important players in the private and public sectors created LuxTrust, a Luxembourg corporation intended to meet the growing needs in security and confidentiality in e-commerce, including in the electronic communications between citizens, administrations, and corporations. According to Greenwich Consulting, Luxembourg also has a significant advantage in terms of workforce and skills. Luxembourg is the OECD country with the largest activity share in NICTs, with 31%. Ultimately, Luxembourg ranks 7th in the world for Internet and telecommunication technology development, according to ITU’s IDI (ICT development Index).

Another significant asset is Luxembourg’s fiscal competitiveness, a “significant factor contributing to the country’s attractiveness”, according to the Greenwich report. Luxembourg has the lowest normal VAT rate in the European Union, with 15% compared to 19.6% in France. In addition, several sectors of the Luxembourg economy benefit from the super low rate of 3%: food products, books and newspapers, pay TV, medical and dental care, etc. The personal income tax and corporate income tax are also “very

attractive”.

But this is not all. The tax system on brands, patents, software, design, and models enables Luxembourg to be the country of choice for all suppliers of immaterial products. For instance, according to the report, “the 80% exemption for income generated by downloads was a deciding factor for Apple’s decision to locate iTunes Europe in Luxembourg”.

New regulations after 2015

In 2015, new EC regulations will apply to VAT. The Ecofin Council has ratified the end of the system in 2019 (with an interim period from 2015 to 2019): from that date on, VAT will be paid to the consumer’s State. This change will result in a progressive decline in budgetary revenues generated by this activity in Luxembourg. It is important to note that the Luxembourg State reaps over 300 million Euros per year in VAT for this sector.

The Minister of Finance Luc Frieden, had confirmed this fact in an interview to the newspaper “La Tribune”. “Of course, this will affect our fiscal income, but it should not change the settlement location of these companies. These corporations settled in our country for fiscal reasons, but not only for that. They know they will enjoy a stable economic, social, and political environment. Therefore, they will continue to operate from Luxembourg”, he said.

Richard G. Minor, former CEO of AOL Europe Services, agrees with this analysis. Even though the company permanently closed its Luxembourg branch this year, Richard Minor is confident in the future of Luxembourg as a location for corporations. In an interview to LW in April, he said that “the government still has plenty of time to be ready for the new, regulatory environment and to continue to attract new corporations to Luxembourg”. The “success story” does not end here...