By Foo Yun Chee
BRUSSELS (Reuters) - France and Luxembourg lost their battle to apply reduced VAT rates to ebooks on Thursday when a top European court agreed with EU regulators that only paper books qualified for lower taxes.
EU rules allow member states to set lower rates of value-added tax on printed books but the European Commission decided two years ago that the 5.5 percent and 3 percent rates imposed by France and Luxembourg respectively, were illegal.
The EU executive said reduced VAT rates did not apply to ebooks as they were an electronically provided service and were not in the list of goods and services granted this privilege.
The vast majority of the EU's 28 countries levy VAT rates ranging from 18 to 25 percent, according to Commission data.
VAT on paper books in contrast ranges from 0 to 10 percent, with the exception of three member states.
Judges at the Luxembourg-based Court of Justice of the European Union (ECJ) rejected France and Luxembourg's argument that ebooks should be considered a good rather than a service.
"The court finds that the VAT Directive excludes any possibility of a reduced VAT rate being applied to 'electronically supplied services'," they said.
"The court holds that the supply of electronic books is such a service," the ECJ ruled.
Amazon, which dominates the ebooks market, has said that lower priced ebooks sell more and ultimately generate more revenue and more royalties for authors.
According to data provider Statista, ebook sales in Europe are expected to account for just over a fifth of book sales in Europe in 2017 compared with 4.5 percent in 2013.
The Commission is now reviewing the VAT rules as part of a revamp of the current transitional VAT system to switch over to a definitive VAT regime, a spokesman said before the court ruling.
French publishers and booksellers said the policy of having higher VAT rates for ebooks than for printed ones ran counter to the goal of encouraging e-reading and urged the Commission to change the VAT rules.
"We call on the European Commission to quickly take the initiative to amend the law to reflect technological progress and eliminate a serious obstacle to the development of the ebook market," they said in a statement.
The case is C-479/13 Commission v France and C-502/13 Commission v Luxembourg.
(Additional reporting by Adrian Croft; Editing by Jon Boyle)