Luxembourg, which is known for its generous tax policies, is where Netflix’s operations in Ireland, Scandinavia and the Netherlands are based.
Streaming services have to pay a 19.6 percent value-added tax on VOD sales in France, but the VAT in Luxembourg is just 7 percent. Headquartering in Luxembourg was a no-brainer for Google and iTunes, which make up the bulk of France’s VOD sales. It’s no surprise that Netflix followed suit.
However, the American tech companies’ success at avoiding higher taxes may be short lived. The European Union recently voted to require service providers to pay sales tax based on point of consumption rather than point of distribution starting in January 2015, Variety reported.
If American tech companies want to play in France, they have to play by French rules.
For example, French video streaming services are required to pay more than 20 percent of their annual revenue to subsidize French movies and European films. This policy is what the French call “l’exception culturelle,” or cultural exception, and it basically means the French government is in the business of keeping France French.
“Netflix should be an additional player, not a stowaway,” French Culture Minister Aurélie Filippetti told Le Journal du Dimanche in January after rumors of Netflix’s 2014 French debut surfaced.
Basing its operations in Luxembourg means Netflix doesn’t have to subsidize French content.
But the Luxembourg loophole doesn’t solve all of Netflix’s potential problems.
French rules for releasing movies in various formats could also be a problem for Netflix. Reuters explains:
“Under current rules, a film cannot appear in an on-demand video service that is bought as a monthly subscription until three years after its debut in cinemas. But if a consumer rents the video of the same film using his set-top box, for example, it would be available four months after its premiere.The long delays for movies by subscription have so far crippled attempts to launch video streaming services in France. Vivendi’s Canal Plus, France’s largest pay-TV service, created one in 2011 called Canal Play Infinity that has attracted few users.”
The role of French telecoms, which wield power similar to American broadband companies, could also be problematic for Netflix’s TV streaming service.
Gaining access to strong local content with mass appeal in France will be the main issue for Netflix, Richard Broughton, senior analyst at IHS Screen Digest told Variety. Partnering with a local Internet Protocol TV operator is the way to do that, but Netflix’s decision to base its operations in Luxembourg will kill any chance it had to partner with Orange, France’s main IPTV provider, Variety reported, citing industry insiders.