Navigating VAT Compliance in the European Union

How to eliminate the headache of tax compliance when selling digital goods across all 28 EU member states

Earlier this year, we took a closer look at the complexity of tax compliance in the United States. Anyone who sells digital goods to consumers across all 50 states knows that there’s no one-size-fits-all for tax compliance. In fact, it’s quite the opposite: Each state has its own unique set of tax regulations that sellers must adhere to at all times.

The same can be said for how Value Added Tax (VAT) is applied and regulated across all 28 member states of the European Union (EU). There’s no one-size-fits-all here either. If you sell digital goods to customers within the EU, you must respect the different rules around how VAT is invoiced, collected, declared, and transmitted to the appropriate local government authorities in each country. This can become a nightmare without the right systems and solutions in place.

If you’re reading this, there’s a good chance you either already sell your digital goods in the EU or are thinking about expanding your sales operations in the EU sometime soon. Fortunately, you’ve come to the right place. Here, we’ve created a short, sweet, and simple guide to help you navigate the ins and outs of VAT compliance in the EU.

What is European Value Added Tax?

Value Added Tax, commonly referred to as VAT, is a staple of tax compliance in the EU, although it’s technically used by 160+ countries worldwide. For many non-EU-based sellers trying to crack into the European market for the first time, managing VAT can feel like uncharted territory.
But to make sure that we’re all on the same page, here’s a standard definition for European Value Added Tax (VAT)—courtesy of its primary governing body, the European Commission: 

 

“The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely, imports are taxed to keep the system fair for EU producers, so that they can compete on equal terms on the European market with suppliers situated outside the Union.”

 

It’s important to note, however, that VAT is not merely a sales tax. According to Investopedia, “VAT is levied on the gross margin at each point in the manufacturing-distribution-sales process of an item. The tax is assessed and collected at each stage, in contrast to a sales tax, which is only assessed and paid by the consumer at the very end of the supply chain.”

You might be thinking to yourself, “There’s not really a ‘supply chain’ to my digital goods, so I’m probably exempt from charging and paying VAT, right?” Not quite. In 2015, EU tax laws expanded to include digital service taxes, now requiring sellers of digital goods to collect VAT in the local country of the consumer. 

To help wrap your head around what this looks like in practice, here’s a quick and easy example. Say you run an e-commerce business in the U.S. and someone in France purchases and downloads one of your digital goods. As part of this transaction, you must charge that consumer VAT at its respective rate in France and then pay VAT received back to the French government. 

This simplified example explains one important thing: If your customers live in the EU, your e-commerce business is subject to VAT regulations. Period. If you don’t charge it to your customers, you’ll have to pay local EU governments the amount in VAT you should have charged directly out of your own pocket. And that adds up fast. To get a little more into the weeds around how this process works, check out this example of digital goods taxation in Germany.

When should you charge EU VAT?

As a friendly reminder, where you operate your business has absolutely no impact or bearing on your VAT compliance requirements. If you sell to consumers across any of the 28 EU member states, you must comply with each country’s respective VAT laws and regulations. 

To make sure you’re in the clear, here are the specific criteria around VAT to keep in mind at all times. You must collect, deposit, and pay VAT if you run an e-commerce business that:

  • Sells digital goods and products;
  • Sells those goods and products to consumers living in the EU; and
  • Drives €10,000+ in revenues from EU-based consumers on those goods and products.

Keep in mind that collecting VAT only applies to business-to-consumer (B2C) purchases. You are not required to collect VAT on business-to-business (B2B) sales. This is called a “reverse charge.” However, you still must collect a zero-rate VAT when invoicing these B2B customers and store their business’s VAT number in your records for general accounting purposes.

What are the EU VAT rates by country?

The complexity of tax compliance across the EU isn’t just a matter of knowing which rates to use in each country, but rather understanding that different rates apply in each country to various digital goods and services. If reading that gave you a headache, you’re not alone. 
Fortunately, there are some great resources available to keep you in-the-know: 

What is the current state of digital services taxes in Europe

What EU VAT registration guidelines must be followed?

Everything has a process. Registering your e-commerce business to comply with VAT regulations is no exception to this rule. At a high-level, the process is pretty simple and straightforward. As you begin to transact with consumers in multiple EU countries, it can quickly get complicated. 

As a starting point, however, here’s what you need to do to get set up correctly:

  • Get a VAT number for your e-commerce business. The good news is that you only have to do this once—and only in one country. There is no need to register for a separate, country-specific VAT number for every EU country in which you do business.
  • Collect VAT on all sales to EU-based consumers. Remember, the VAT rate you charge and collect is based on where your shoppers live. This will vary from country to country and can change from year to year. Make sure you are always up-to-date on the latest rate changes happening in Europe.
  • Provide accurate and detailed VAT receipts to shoppers. After consumers make a purchase, you must provide them with a detailed receipt that outlines the following:
    • Your legal business name
    • Your business VAT number
    • The transaction sub-total
    • The applicable local VAT rate
    • The VAT charged (based on that local rate)
    • The grand total amount charged to the shopper

Transparency is key here. Because VAT can be collected and paid along a chain of consumption, it’s important that all parties involved are clear on their VAT obligations.

  • Store proof of your shopper’s location. In the event that your business gets audited, you must be able to prove that your EU-based shoppers were invoiced at the correct VAT rate based on where they reside in Europe. If you do more than €100,000 of sales in the EU, you must store two pieces of evidence for each of your shoppers; if you sell less than that, only one piece of evidence will suffice. Billing and IP addresses are not only the most typical pieces of evidence to store, but they are also the easiest, too.
  • Submit quarterly tax returns. This part is fairly straightforward. You simply need to line-item how much VAT you’ve collected across all of the EU countries in which you do business and then pay the correct amount due in each country.

VAT compliance in Europe made easy with Nexway

Businesses already have a lot to think about. First and foremost, they should be focused on getting their digital goods, products, and services in the hands of their target consumers. The last thing they ever should worry about is navigating complex and cumbersome tax laws as they work hard to grow and expand their e-commerce business into new markets.

That’s where Nexway comes into the picture. Our industry-leading solutions—along with our team of global e-commerce and tax compliance experts—makes complying with local tax laws and regulations incredibly easy. We don’t simply register your VAT number and calculate the taxes to collect on purchases made by EU residents. Our powerful platform goes one step further by immediately transmitting those taxes to the appropriate local government agencies and authorities whenever you submit them. This saves you time, effort, and money while also making your e-commerce business operations across the EU streamlined and worry-free.

And although our in-house experts know the ins and outs of VAT and digital services taxes across Europe, we can also set up your e-commerce business for success in over 140 countries worldwide. Our ability to scale your business fast—and always in compliance with local tax regulations—sets Nexway apart, making us a partner in your business’s long-term success.

Now, you’re faced with a choice: Will you try to tackle the windy road of EU VAT compliance on your own or will you let us do the heavy-lifting for you?

If you want to sell your digital goods to consumers in the European Union with confidence, the team at Nexway is ready to help

The Nexway Team