If you want to sell your digital product in the EU, chances are you must register for EU VAT. (If you already sell in the EU and don’t have a VAT number yet, this is urgent! Okay, keep reading.)
The good news is that the VAT registration process is pretty simple. The tricky part is: once you have a VAT number, how do you keep track of all the different VAT rates and apply the correct one to each sale?
Let’s first learn how to apply for an EU VAT number, and we’ll offer solutions for everything else at the end. 🙂
Does your company need an EU VAT number?
If you sell digital products to EU consumers, you might be required to register for VAT and apply VAT taxes to all of your EU sales.
Actually, it’s possible to voluntarily register, too, even if you don’t meet the requirements. There are some benefits to registering, which we’ll explore later!
First, let’s better understand VAT and why a VAT number is necessary.
VAT is the abbreviation for “value-added tax,” in the EU and around the world. It’s a consumption tax that’s charged incrementally throughout a product’s path to market, based on the total value added at each stage. In the EU, it’s levied as a destination-based tax, meaning the exact tax rate is based on the location of the buyer.
VAT works in two ways, B2C and B2B.
First, a consumer is taxed on the purchase of a product or service in the EU. The VAT tax appears as a separate line item on an invoice or receipt. (This is legally required!) Then the seller collects the VAT from the customer, and holds onto it until tax season, when they pay it forward to the appropriate tax agency.
Read more about how to create legal invoices and tax receipts.
Second, a business is charged VAT on input materials and services. When it’s time to file a tax return, the business receives a credit for VAT taxes already paid. This reduces the business’s overall tax burden. With B2B transactions between VAT-registered businesses, there’s also a special tax scheme called the reverse-charge mechanism.
But in order to receive these benefits of VAT tax reduction, companies need to have a VAT number.
A VAT number is a value-added tax identification number that allows governments to track the VAT activity of registered businesses. These activities include VAT paid, tax credits earned, and VAT taxes charged and collected from customers.
VAT numbers usually start with an ISO 3166-1 alpha-2 country code, followed by two or more characters, up to thirteen. Though VAT numbers usually consist of numeric digits only, some western countries have VAT numbers that also contain letters. (Also, fair warning, foreign countries outside of the EU may have a VAT number starting with “EU.”)
Requirements for a VAT Number
The determining factor for whether your business must register for EU VAT is whether you sell to businesses or private consumers.
- If you only sell digital products in B2B transactions, then you do not need to register for EU VAT.
- If you ever sell digital products B2C in Europe, even just once, then you need to register and get your business a VAT number!
There are many benefits of obtaining a VAT number. After reading about them below, you might decide that it’s best to just go ahead and register your business for EU VAT!
Top benefits of applying for a VAT number as a non-EU business
There are many benefits of obtaining a VAT number. If any of the below are of interest to you, it may be a good idea to get a VAT number and start charging a VAT tax.
Avoid financial penalties
It’s not uncommon for a small business’s taxable turnover to inch above the VAT threshold. If this happens to you and you don’t know it, you’ll be slapped with fines and penalties. It’s better to apply for a VAT number before you actually need it.
Increase your company profile
A lot of international companies aren’t willing to do business with small companies that aren’t VAT-certified. To give your business validation and the perception of scale, apply for a VAT number. It will help you do business with larger firms.
Receive EU VAT refunds!
VAT-registered companies can claim VAT taxes on goods and services they purchased for their business. This reduces your company’s taxable income in the EU and saves you money.
How to Get a VAT Number in the EU if You’re a Foreign Company
Each country within the EU has its own VAT systems. Each of these systems generates a VAT number that covers sales within Europe but outside the country where your business is headquartered.
To help you better understand the registration process, we’ve outlined the steps needed to get a VAT number, using Ireland as an example:
1. Choose a specific EU country and register through their national VAT MOSS. For most foreign businesses, the Irish VAT MOSS is the best choice, because it’s all in English with an easy-to-use design. (You have the right to register in any of the 28 member states. For example, if your business is based in South America, you might like to register in Spain, where all resources are published in Spanish. There’s a risk, though, that these other countries have a complicated MOSS portal.)
2. Add your company information and bank account details.
3. Then enter your personal contact information.
4. From there, you’ll be asked about your company’s VAT history.
5. After this, the portal will send you to a summary page where you can review all the information you entered. Make sure it’s all correct!
6. Submit. And that’s it!
That’s the whole application process. You’ll receive your VAT number either electronically or by mail.
What happens after you get a VAT Number?
If you’re a non-EU business, you’ll need to apply for a VAT number in order to do business in any of the 27 member states.
So, make sure you understand how a value-added tax works, as well as how to get a VAT number, and then apply for your number using the example above.
What happens after you have your VAT number? Well, as a registered business, you must start adding VAT tax to every sale. There are special rules depending on whether the transaction is B2B or B2C. And probably the most complex part: every country has their own VAT rates. So when you sell to a customer in Hungary, you must apply the Hungarian VAT rate, etc.
There’s a lot of information to keep in mind. For a small business, it can be a big burden, but there are solutions to help you (such as Quaderno, our tax automation software). Take a look at What You Must Know About VAT if You Have Customers in Europe for a clear breakdown of how to comply with EU VAT once you’re all registered.
Finally, if you do choose Ireland’s VAT MOSS for your VAT registration, then circle back when tax season rolls around! We have a quick guide on how to submit an Irish VAT MOSS return as a non-EU business.