Skip to main content

27.1 VAT Fundamentals: Four-Tier Rate Structure (17%, 14%, 8%, 3%)

What Is VAT?​

Value Added Tax (VAT)—TVA (Taxe sur la Valeur Ajoutée) in Luxembourg—is a consumption tax levied on the value added to goods and services at each stage of production and distribution. Unlike sales tax, which is charged only at the final sale, VAT is collected at each transaction in the supply chain.

How VAT Works​

VAT operates on the principle that businesses:

  1. Collect VAT on their sales (output VAT)
  2. Pay VAT on their purchases (input VAT)
  3. Remit the difference to tax authorities (net VAT payable)

Example:

  • Restaurant sells meal for €100 (including €14.53 VAT at 17%)
  • Restaurant receives €14.53 VAT from customer
  • Restaurant paid €5.13 VAT on ingredients (input VAT)
  • Restaurant remits €9.40 to tax authorities (€14.53 - €5.13)

Luxembourg's Four-Tier VAT Rate Structure​

Luxembourg uses a four-tier VAT rate structure, each rate applying to specific categories of goods and services:

Standard Rate: 17%​

Applies to: Most goods and services not specifically listed under other rates.

Examples:

  • General retail sales
  • Professional services (legal, accounting, consulting)
  • Restaurant food (excluding beverages)
  • Most manufactured goods
  • Digital services

Calculation:

  • Price excluding VAT: €100
  • VAT (17%): €17.00
  • Price including VAT: €117.00

Intermediate Rate: 14%​

Applies to: Specific categories of goods and services.

Examples:

  • Wine and alcoholic beverages (in restaurants)
  • Certain energy products
  • Some construction services
  • Specific professional services

Calculation:

  • Price excluding VAT: €100
  • VAT (14%): €14.00
  • Price including VAT: €114.00

Reduced Rate: 8%​

Applies to: Essential goods and services.

Examples:

  • Most food products (for home consumption)
  • Non-alcoholic beverages
  • Books and publications
  • Pharmaceutical products
  • Passenger transport
  • Hotel accommodation
  • Some cultural services

Calculation:

  • Price excluding VAT: €100
  • VAT (8%): €8.00
  • Price including VAT: €108.00

Super-Reduced Rate: 3%​

Applies to: Essential goods and services.

Examples:

  • Basic foodstuffs (bread, milk, meat, fruits, vegetables)
  • Water supply
  • Medical equipment
  • Books (printed)
  • Public transport tickets
  • Some social services

Calculation:

  • Price excluding VAT: €100
  • VAT (3%): €3.00
  • Price including VAT: €103.00

VAT Rate Summary Table​

RatePercentageTypical Applications
Standard17%Most goods and services, restaurant food, professional services
Intermediate14%Wine/alcoholic beverages, certain energy products
Reduced8%Food products, books, pharmaceuticals, hotel accommodation
Super-Reduced3%Basic foodstuffs, water, medical equipment, public transport

Determining the Correct VAT Rate​

To determine the correct VAT rate, consider:

  1. Type of Good or Service: What are you selling?
  2. End Use: Is it for business or personal consumption?
  3. Sector Rules: Are there sector-specific rules (restaurants, retail)?
  4. Legal Classification: Check official VAT rate schedules

VAT-Exempt Transactions​

Some transactions are VAT-exempt (no VAT charged):

  • Financial services (banking, insurance)
  • Medical services (by qualified professionals)
  • Educational services (by recognized institutions)
  • Real estate transactions (sales of buildings)
  • Certain public services

Important: VAT-exempt businesses cannot recover input VAT on purchases.

Zero-Rated vs. Exempt​

  • Zero-Rated: VAT rate is 0% (rare in Luxembourg, mainly exports)
  • Exempt: No VAT applies, but input VAT cannot be recovered

Luxembourg Compliance Note​

Using the wrong VAT rate can result in:

  • Penalties and interest charges
  • VAT audits
  • Requirement to correct past returns
  • Potential criminal liability for fraud

Always verify the correct VAT rate for your specific goods or services. When in doubt, consult the official VAT rate schedules or your accountant.

Think It Through​

Marie's restaurant serves a meal that includes food (17% VAT), wine (14% VAT), and bottled water (8% VAT). How should she calculate and record the VAT for this transaction? Should she use one rate or multiple rates?

Concepts in Practice​

Restaurant VAT Complexity

Le Petit Bistro must apply different VAT rates:

  • Food sales: 17% VAT
  • Wine/alcoholic beverages: 14% VAT
  • Non-alcoholic beverages: 8% VAT
  • Takeaway food: 17% VAT (same as dine-in)
  • Catering services: 17% VAT

Marie must track each category separately to ensure correct VAT calculation and reporting.