Navigating the storm: Import VAT and customs challenges - a Luxembourg point of view

The current landscape of import VAT and customs

The landscape of import VAT and customs for years has been significantly affected by various factors, including geopolitical tensions, trade agreements, and the ongoing aftermath of the COVID-19 pandemic. These disruptions have led to increased scrutiny of customs processes, changes in tariffs, and evolving regulations that businesses must navigate. 

Geopolitical tensions, particularly between major economies, have always resulted in fluctuating tariffs and trade barriers. The US-China trade war, for instance, has led to increased tariffs on a wide range of goods, impacting import costs for businesses. Similarly, the EU's trade policies and agreements with other countries can create disparities in import VAT and customs duties that businesses must consider.

The COVID-19 pandemic has further complicated the import landscape. Supply chain disruptions, labor shortages, and increased shipping costs have all contributed to rising import expenses. Businesses must now account for these additional costs when evaluating their import strategies.

Recent Developments on Customs Tariffs Post-Trump Election

The election of Donald Trump in 2024 marked a significant shift in US trade policy, particularly concerning customs tariffs. His administration implemented a series of tariffs aimed at protecting American industries, particularly in response to perceived unfair trade practices by countries like China. 

President Donald Trump issued a memorandum on reciprocal trade and tariffs on 13 February 2025, saying there is an economic and national security threat posed by trade deficits and aiming to address trade practices he deemed unfair to the US. 

The memorandum introduced a “fair and reciprocal plan” and directed the US trade representative (USTR) and the Commerce Department to examine and equalize the tariff rates applied to US exports by each trading partner while considering non-tariff barriers such as VAT, government subsidies, and other regulations affecting US companies.  

Trump further signed an executive order on 2 April 2025, introducing a new minimum 10% baseline tariff applied to all US trading partners and reciprocal duties ranging from 13% to 54%. These tariffs, calculated as half of the bilateral deficit relative to imports from each partner, target economies that run the largest bilateral trade surpluses with the US or those that impose significantly larger tariffs on US exports.  

As a consequence, US will levy an additional 10% customs duties on imports from the EU for the time being — i.e., while the EU and US seek to reach an agreement during their currently ongoing discussion. If the discussions are not successful, the US levied customs could increase to 20% after a delay of 90 days. For the time being, a special tariff of 25% has been (re-)introduced for the steel and automotive sector.

On the EU side any increase of customs duties has been put on hold for the duration of the discussion with the US over the next 90 days. In case no agreement is achieved, additional tariffs ranging between 10% to 25% might be implemented.

Comparing Import Costs: US vs. EU

Given these volatile times, businesses need to compare import costs to continue to make the right decisions for their supply chain. 

When comparing import costs between the US and the EU, businesses should consider several key factors — including whether VAT applies and is deductible, the applicable VAT rate customs duties, and additional fees.

In the EU, VAT is a consumption tax applied to goods and services, with rates varying by Member State. On average, EU VAT rates range from 17% to 27%. In contrast, the US does not have a federal VAT system; instead, it relies on state sales taxes, which can vary significantly from one state to another. This difference in tax structures can lead to varying import costs depending on the destination of the goods.

Customs duties are another critical factor in determining import costs. The EU has a common customs tariff, which means that goods imported from outside the EU are subject to the same duty rates across member states. In the US, customs duties can vary based on the product category and the country of origin. Businesses must be aware of these differences when calculating their total import costs.

In addition to VAT and customs duties, businesses should also consider additional fees associated with importing goods. These can include handling fees, storage fees, and compliance costs related to customs documentation and regulations. The complexity of customs procedures in both the US and the EU can lead to increased compliance costs, which businesses must factor into their overall import strategy.

Though import VAT is in principle due upon importation, it is in theory deductible if the importing business realizes the import for its business purpose and is entitled to a full input VAT deduction right. There might however be timing differences between the date import VAT would become due and the date import VAT could be reclaimed and would be refunded.

One effective way for businesses to manage cash flow related to import VAT is through deferment schemes available in various Member States in the EU.  These schemes allow businesses to defer the payment of import VAT and differ in nature between the Member States. Import VAT payment might thus be deferred for instance until it either could be set-off against the receivable or reclaimed or the goods are sold or used, rather than paying it upfront at the time of importation.

By deferring VAT payments, businesses can thus retain cash for a longer period, allowing them to invest in operations, inventory, or other critical areas; deferment schemes can consequently provide businesses with greater liquidity, reducing the need for short-term financing to cover VAT costs; with deferred VAT payments, businesses can streamline their accounting processes, as they only need to account for VAT when the goods are sold.

To benefit from deferment schemes, businesses must typically meet certain eligibility criteria, which may include having a valid VAT registration and maintaining accurate records of imports. It is essential for businesses to consult with VAT experts or customs authorities to understand the specific requirements and procedures for implementing deferment schemes in their operations.

While VAT is generally recoverable for businesses registered for VAT, there are circumstances where it can become a cost. This is particularly relevant in Luxembourg, where the VAT system has specific nuances that businesses must navigate.

If a business carries out VAT-exempt supplies under Art 44 of the Luxembourg VAT Law, it may not be able to recover the VAT incurred on related imports.

Businesses that make both taxable and (Art. 44) exempt supplies may face partial exemption rules, which can limit their ability to recover VAT on imports.

Understanding when import VAT can become a cost is thus crucial for businesses operating in Luxembourg, as it can significantly impact their financial performance. 

Strategies for Businesses

To effectively navigate the challenges of import VAT and customs, businesses should consider the following strategies:

Businesses should conduct a thorough analysis of their import costs, comparing the total expenses associated with importing goods from the US and the EU. This analysis should include the deductibility of VAT, the VAT rates, customs duties, and any additional fees. By understanding the total cost of imports, businesses can make informed decisions about their sourcing strategies.

Given the dynamic nature of import VAT and customs regulations, businesses must stay informed about any changes that may impact their operations. This includes monitoring updates from customs authorities, trade organizations, and industry associations. By staying informed, businesses can adapt their strategies to mitigate potential disruptions.

Investing in technology and automation can help businesses streamline their import processes and reduce compliance costs. Customs management software can assist in tracking shipments, managing documentation, and ensuring compliance with regulations. By leveraging technology, businesses can enhance their efficiency and reduce the risk of costly errors.

Engaging with VAT and customs experts can provide businesses with valuable insights and guidance. These professionals can help navigate the complexities of import regulations, identify potential cost-saving opportunities, and ensure compliance with all relevant laws. Collaboration with experts can ultimately lead to more informed decision-making and improved import strategies.

Conclusion

The challenges associated with import VAT and customs are multifaceted and require careful consideration by businesses operating in today's global economy. By understanding the differences in import costs between the US and the EU, as well as the potential for cash flow management through deferment schemes, businesses can make informed decisions that positively impact their bottom line. Additionally, recognizing when import VAT can become a cost, particularly in Luxembourg, is essential for maintaining financial health. Through comprehensive cost analysis, staying informed on regulatory changes, leveraging technology, and collaborating with experts, businesses can navigate the storm of import VAT and customs challenges and emerge stronger in the competitive landscape.