In this article
- What is VAT?
- Why are Non-EU businesses responsible for EU VAT?
- How should a foreign business handle EU VAT?
- Step 1: How does a Non-EU business register for EU VAT?
- Step 2: What should you verify about your customers in the EU?
- Step 3: When does a Non-EU business have to charge VAT to EU customers?
- Step 4: What should be included in a VAT invoice?
- Step 5: How to file EU VAT returns
- Are Non-EU businesses eligible for EU VAT refunds?
- Can a Non-EU business just not pay EU VAT?
- This sounds complicated. What can help Non-EU businesses handle VAT?
EU VAT is levied in all 27 member states. If you’re a business anywhere in the world and you have customers in the European Union, listen up, as we're answering the million dollar question: “Do I charge VAT to EU customers?”
It’s time to get serious about Value-Added Tax, the one you should be applying to almost every sale you make in the EU. And the tax you should be reporting back each quarter.
For decades, many businesses selling goods and services into the EU have thought that as long as they pay taxes in their home country, they’re as good as gold. But that’s not the case anymore.
As a supplier of digital products to EU customers, you’re responsible for charging, collecting, filing, and paying this Europe-specific tax.
We’ve gathered all of the essential information, answered all the questions we imagine are kicking around in your head, and laid out everything about EU VAT for remote sellers in one place.
If you're a seller in the US (or plan to be soon), you may be wondering, "do US businesses have to pay VAT in the EU?", so we've prepared a quick video for you to answer that specific question:
In this post, you'll learn about what VAT exactly is, why your business could be required to charge VAT if you're outside of the EU, and 5 steps to get your business compliant as a remote seller to the EU.
Let's jump in!
What is VAT?
We can answer the most obvious question first. VAT stands for “Value-Added Tax.” It’s a consumption tax that applies to all goods and services, whether physical or digital. That means every time a customer purchases a good or service in the EU, they pay VAT on the spot. In the US, the specific consumption tax is called sales tax. VAT is a consumption tax that exists outside of the US and GST-participating countries. A lot of users will ask us the question "Is there sales tax in Europe?", and while sales tax is a term used for the US, the consumption tax, or sales tax, is VAT in Europe.
The seller (your business) collects the VAT from the customer and pays some or all of it to the government. In this way, you can see yourself as a kind of tax middleman. It’s not your money paying for the VAT, you’re just collecting and submitting the customer’s money to the government.
That’s why it’s important to know when to charge VAT in Europe to your EU customers. Because if you don’t charge the customer, then actually it will be your money paying for it! The government will still expect the taxes from you, whether you knew to add VAT or not.
How much VAT should you add?
That depends on where your customer is located. Rates vary across the different EU member states, ranging from 17% to 27%, and the EU has set a standard minimum VAT rate of 15%. Switzerland is not part of the EU and has it own standard VAT rate of 7.7%. In our overall guide, you can find an up-to-date list of EU digital tax rates. (And we’ll explain this more in a moment!)
Why are Non-EU businesses responsible for EU VAT?
Because European governments want to ensure they receive taxes on all goods and services consumed by their citizens, even digital goods and services coming from other parts of the world.
If foreign businesses weren’t required to charge VAT to EU customers, imagine the disadvantage that would place on EU-based businesses. Their products would cost more. Their local customers would look outside the region to find something cheaper, and EU businesses would suffer. Then, when the EU businesses suffer and make fewer sales, their governments collect less tax.
So, requiring non-EU businesses to charge VAT evens out the playing field for local vendors, and it increases the EU governments’ tax revenues. It’s all economics, baby.
If you’re really into legal stuff, you can check out the original 2003 EU directive about VAT on digital services.
How should a foreign business handle EU VAT?
Here are five simple steps to correctly navigating the tax maze:
- Register your company for EU VAT.
- Verify your customer: Who are they? Where are they?
- Charge the tax, if you need to.
- Provide detailed invoices (and keep record of them, too!)
- Submit quarterly returns.
We’ll break it all down for you.
Step 1: How does a Non-EU business register for EU VAT?
You can register for VAT in the EU member state of your choice. That gives you 27 countries to choose from! If you need an English-speaking base, the obvious option is Ireland.
Once you’ve chosen where you want to base your EU tax operations, you register for a VAT One-Stop Shop (OSS) with that local tax authority. You can do this online. Find the “non-Union scheme” option, as this process is designed for non-EU businesses.
Hold up… One-Stop what? Yeah, it’s a funny name, but it saves you serious time and energy! Let us explain:
On 1 July 2021 the new One-Stop-Shop schemes for goods and services in the EU came into effect. If you have customers in EU countries, there is a high chance that this will impact your business operations. The One Stop Shop allows you to consolidate all of your EU VAT in one single tax return, even if your customers live in multiple different countries.
Let’s say you choose to register in Ireland. You apply for a VAT OSS on the Irish Tax and Customs website. You sell to customers in Spain, Germany, Hungary, and Italy. When tax season comes around, you submit one VAT return to your OSS in Ireland. Your Irish OSS then calculates how much VAT should be returned to the tax authorities in Spain, Germany, Hungary, and Italy — and distributes all of that for you. Beautiful, right?
(As for how to actually submit those VAT returns, you’ll learn more about that in Step 5.)
Quick recap of how to register for EU VAT:
- Choose an EU country
- Go to their OSS website
- Look for the “non-Union scheme”
- Receive your VAT number!
For even more detailed guidance, read on about how to get a VAT number if your business isn’t based in Europe.
Step 2: What should you verify about your customers in the EU?
You need to verify two things about your EU customers: who they are and where they are. The first determines whether or not you should charge them VAT, the second determines how much.
Determine who they are:
When you make a sale in the EU, request the buyer’s VAT number. Businesses will have one, private individuals will not. Unfortunately, some buyers may try to pretend they’re a business just to avoid the tax charge, so they’ll submit a phony VRN. For that reason, check to make sure each VRN is valid. You can use this simple VIES validation tool from the European Commission. Read on for more information about what VIES is.
Determine where they are:
In addition to requesting the buyer’s VAT number, you also need to request proof of their location. Their location will determine the rate of VAT you add to the sale, since each EU member state has its own rate.
Next, to prove to the government that you’re charging enough tax, you also need to prove where your customer is located. So, when making a sale, kindly request two of the following pieces of evidence:
- Billing address
- Location of the customer’s bank
- Country which issued the credit card
- The IP address location of the buyer’s device
- Country of the SIM card (in cases where the purchase was made on a mobile device)
Finally, document this location evidence and keep it on record for 10 years. A decade is a ridiculously long time, but that’s the law. A cloud-based accounting and tax software can make collecting this evidence and storing it really easy; the collection of data is automatic, and there’s no risk of losing records.
Step 3: When does a Non-EU business have to charge VAT to EU customers?
The short answer for VAT rules for US companies and GST companies is not always. It depends on where your customer is and whether your customer has a valid VAT Registered Number, or VRN.
If they don’t have a VRN, you do charge VAT
This means your customer is a normal end-consumer. It’s your average B2C transaction. You must charge VAT on the sale, and then follow the rest of the protocol we explained above.
If they do have a valid VRN, you do not charge VAT
This means your customer is a fellow business, and therefore you’re exempt from charging and collecting tax. You don’t have to worry about it because the transaction is covered by the reverse-charge mechanism.
Reverse-charge mechanism? This also makes your life easier if you are selling B2B. With this, the buyer is totally responsible for filing VAT on the transaction. Since local companies can be reimbursed for any tax they spend on products to help run the business, it’s more efficient if they simply keep the money in the first place — rather than pay it to you and later claim it back from the government.
Step 4: What should be included in a VAT invoice?
A tax invoice includes quite a bit more information than a normal invoice. Each one should contain:
- Your business’ name and address
- Your business’ VAT number
- Invoice date
- Invoice sequencing number
- Buyer’s name and address
- Buyer’s VAT number. If you are using the reverse-charge mechanism, you must also add the text “EU VAT reverse charged”
- VAT (amount and rate) applied to each item
- Final amount after tax is added
- The currency used
Even though that’s a lot of specific information, you can still organize everything so that it’s easy to read. Here’s an example of how to structure a VAT invoice:
Keep each invoice on record for five years. Why? Because the EU tax authorities want these on-hand should any official institution inquire. If you ever receive a request, you’d have to make these records electronically available within 30 days. So best practice is to keep digital files in a cloud-based storage system, or simply within your sales tax software, if you use one.
Step 5: How to file EU VAT returns
When to file a VAT return
You submit one EU VAT return to your OSS at the end of each quarter. Every three months, four times a year, you get the idea. From the last day of each quarter, you have 20 days to file and pay. So the deadlines are as follows:
- 20 April, for first quarter ending 31 March
- 20 July, for second quarter ending 30 June
- 20 October, for third quarter ending 30 September
- 20 January, for fourth quarter ending 31 December
How to file a VAT return
You submit your return online. You can prepare for filing by calculating your input tax, output tax, and keeping your invoice records at hand. And for some simple, smart accounting tricks, check out how to maximize your business tax returns.
Something to keep in mind: if you made any sales in a different currency (i.e., in the Danish Krone, but your OSS uses the Euro), you will need to convert those amounts to the official currency of your OSS. Use the European Central Bank’s official exchange rates.
Based on the information you enter, the OSS website will automatically calculate how much tax you owe. Then you’ll receive instructions on how to complete the payment.
Are Non-EU businesses eligible for EU VAT refunds?
Sure, you are. If you overpay through the OSS scheme, then you’ll get the money back. But it won’t be from your One-Stop Shop; the refund will come directly from the various tax authorities where your customers are located. So, you’d get a partial refund from Spain, from Germany, from Hungary, or from Italy. This also means the refund will come in their local currencies.
The great thing is that refunds are directly deposited to your bank account, whichever bank information you provided in your OSS registration. So just make sure those details are up-to-date!
Can a Non-EU business just not pay EU VAT?
Legally, no. If you choose to not comply with EU VAT law, you risk getting caught by tax authorities. With that comes paying for years of back-taxes plus penalties for not following the rules. A blow like that could potentially ruin a small business. Moreover, if it turns out you’ve intentionally broken the law, you could find yourself in court. No one wants to be convicted of fraud, right?
Last but not least, you could look at it as a matter of ethics: if you enjoy the privilege of selling to customers in their country, shouldn’t you also pay the respect of following their laws? It’s just the right thing to do.
As they say, peace of mind is priceless.
This sounds complicated. What can help Non-EU businesses handle VAT?
Okay, so maybe this all wasn’t as simple as we hoped. The best way to clarify and simplify this craziness is to use a cloud-based accounting tool that automates the entire process — from charging the correct tax to collecting payment to issuing the proper invoice. All of your records are kept safely online for you, even if your computer crashes.
Quaderno handles all of this tax compliance for you so that you can spend your time focusing on dominating the European market — on bettering your product, getting to know your customers, taking care of your employees, or whatever else matters more than fretting over tax technicalities.
In fact, Quaderno can do all of the following:
- Calculate the right amount of tax to charge each customer, right on your checkout page.
- Automatically verify the tax IDs you receive from customers.
- Collect and store the customer location evidence that you need to get from every sale.
- Create and send invoices in multiple languages and currencies.
- Send invoices automatically.
- Ensure you never overpay on your returns.
- Notify you when any tax policies or tax rates change so that you’re always in the loop.
And that’s only how Quaderno can help with EU VAT. When it comes to US sales tax, Goods and Services Tax (GST), and others around the world, or simply everyday invoicing and accounting — Quaderno jumps through all the hoops for you and presents your business data in a way that’s easy to understand.
Sign up for a free trial and see how Quaderno can cut through all the bureaucracy for you.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.