Luxembourg: Which Business Model Will Enable A Circular Economy?

Last Updated: 15 December 2017
Article by Gilles Poncin

Most Read Contributor in Luxembourg, December 2017

Ushering in a truly circular economy, i.e. one that runs on products, components, and materials that are reused instead of discarded, requires more than the will to change one's behaviour. It takes real updates to how we approach the taxation of services and materials. Our last article looked at how stakeholders would feel the different VAT impacts of the resell model, one concrete circular business model. We would like this time to examine another circular business model, the product-as-a-service (PaaS) model. We'll look at the fiscal implications (both in terms of VAT and direct tax) for service provider, customer, and State.

What is the product-as-a-service model?

Do we actually need to own the products we use? That is the question that drives the performance economy. First studied by Walter Stahel in the late 1980s,1 the "functional service economy" (also called performance economy or service economy) introduced new business models where a company sells performance instead of goods—like mobility instead of cars. Today this is called the pay-per-use, subscription, or product-as-a-service model. It ranges from pay-per-week handbag usage, to pay-per-cycle washing machine usage, to pay-per-lux light usage. The objective is to maximise the value extracted from material resources, and to decouple economic growth from resource consumption. As such, it is one of the main schools of thought feeding into the concept of a circular economy. According to Jeannot Schroeder, managing director of +ImpaKT and contributor to this article, "this business approach is a real game changer for a more circular approach as all the of the environmental consequences stay with the producer."

Do PaaS models affect tax expenses?

While there are many arguments in favour of PaaS models, e.g. customer loyalty or cash flow predictability, the fiscal implications have not yet been fully studied. To study the tax impacts of such a business model, we might take the example of light-as-a-service.2 In this business model, a company (provider) sells the service light to another business (customer) instead of selling lighting as an asset. For this example, let's say the service is sold for a fee of €50 per year (excl. VAT), instead of as an asset sold for a one-shot price of €1,000. (It must be noted that this is a simplified example in which only the provision of the lighting is considered, and not the possible repair services or other related transactions).

Let us start by looking the table below, which compares the VAT flows between the baseline scenario (the sales model) and the PaaS model.

In the traditional sales model, the provider purchases the equipment for €500 (plus €50 VAT). The customer then pays a price of €1,000 (plus €100 VAT, assuming a VAT rate of 10%). For the provider, the transaction is always VAT neutral. That the provider paid €50 VAT on the purchase of the asset (or its materials) puts him/her in a tax credit position and allows him/her to net €50 of the €100 VAT paid by the customer. The State receives the remaining €50.

In the PaaS model, the customer pays a yearly service fee of €50 over a 20-year contract. This means that, instead of collecting €100 VAT in year 1, the provider collects €5 annually. VAT legislation allows the provider to be compensated by the State immediately in the first year for the VAT paid on the purchase of the asset: in this case, the provider gets €50 back. The result is that the State pre-finances the VAT and only gets it back in €5 instalments over 20 years.

When looking at the VAT flows over the 20 years, the total paid/received is the same in both models. However, the distribution of the flows over the timeline changes.

In this example, the PaaS model is favourable to the customer because he/she can spread the VAT expenses out over a longer period of time, which can make a big difference. The PaaS model is unfavourable to the State, however, which must pre-finance the VAT to compensate the provider but can recover the remaining VAT only gradually. For the provider, the transaction is VAT-neutral in both models. Ultimately this example shows how the "time value" of money3 can make a circular business model more or less attractive for the actors involved.

To determine the impact on direct taxes, we need to look at the income flows and depreciation expenses in both scenarios. We'll assume a fictional income tax of 20% and a depreciation life of 20 years for lighting equipment.4

From the customer's direct tax perspective, it makes no difference whether a yearly rental expense of €50 is paid or a yearly depreciation expense of €50 (€1,000 over 20 years) is taken.5 Both result in an annual reduction of the income tax by €10. For the provider, however, there is a difference: while in the sales model the provider pays direct taxes on the €500 profit (€1,000–€500) immediately, in the PaaS model the profit amounts to the yearly rental income minus the yearly depreciation expenses spread over 20 years. Although the total income tax paid will be the same in both models (€100), their being spread out over 20 years makes the PaaS model favourable for the provider and unfavourable for the State from a direct tax perspective.

In summary

In this specific case of moving from a linear sales model to a PaaS model, the tax implications are the following:

What does this imply?

It would appear that there are no immediate tax barriers for businesses engaging in PaaS models—neither in terms of VAT nor of direct taxation.

That being said, the analysis also seems to suggest that the PaaS model may be unfavourable in cash flow terms for the State. However, our example provides only a very reductionist view of the situation. It does not consider the positive indirect effects created for society and the State. For example, a case could be made suggesting that PaaS models would generally include maintenance and repair services, thus increasing the yearly service fee and thereby the income tax collected. Additionally, activities related to the PaaS model like repair, reconstruction, and recycling are labour-intensive and can therefore increase labour tax income for the State. Moreover, positive side effects like new jobs and reduced pollution should also be kept in mind.

This case study shows that tax policy is worth thinking through carefully if it is to successfully incentivise the transition towards a circular economy without having negative side-effects. Deeper analyses and simulations will bring more definitive answers—we have barely scratched the surface in this blog post.


1 Stahel (1987): "Economic strategy of durability, elements to valorize the service life of goods as a contribution to waste prevention", Bankverein Book Nr. 32, November 1987, Basel.

2 Light-as-a-service is, for example, sold by Philips in the Netherlands.

3 €1,000 today is not worth the same as €1,000 in 5 years, due to inflation and potential interest earned. This is the meaning of the "time value" of money, one of the core principles in financial theory.

4 In this example, the contract duration equals the depreciation life and the yearly rent equals the yearly depreciation expense for the customer. This has been chosen on purpose in order to make a direct comparison of direct taxes possible.

5 This is true in this simplified example. In real life, the provider can of course choose a yearly rent higher or lower than the depreciation expense for the customer. However, one can assume that it would be close in order to be attractive for both parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
30 Jan 2018, Speaking Engagement, Luxembourg, Luxembourg

Laurence Vanhée knows what it takes to be happy at work, and she wants to share the secret—and soon: after her TEDxAlsace talk in France, she’s coming to Luxembourg.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions