Ordering goods per internet that are sent directly to your home has become increasingly popular these days. It’s easier, more convenient and you can do it while riding a bus or waiting for your dentist appointment. While you could already buy clothes from catalogues decades ago, you can even do your groceries shopping via your smart phone today. But what are the tax obstacles in this area for companies offering those services within the EU?
What is “distance selling”?
When using the term “distance selling”, the EU VAT law talks about retailer from one EU country selling and delivering goods cross-border to private persons (consumer, or “B2C” customer, or non-VAT-taxable person) in another EU country. The qualification of B2C customers are discussed at length in this post. A short summary: any person (natural or legal) without a valid VAT number is consider as B2C customer for VAT purposes. If you do not have your customer’s VAT number, you have to treat them as non-taxable person for VAT purposes (but not necessarily also for purposes such as consumer protection legislation).
If your company is offering goods via an online shop platform, you have to (as a bare minimum) consider the following questions:
- Is your company selling goods to customers all over the European Union? If yes, you will have to deal with the European VAT rules.
- Is your company selling goods to private persons? If yes, you need to consider the so-called “distance selling” rules.
From the European VAT perspective, an intra-EU sale of goods (i.e. cross-border sale of goods within the EU) can only be VAT exempt, if the recipient of the goods takes care of the taxation in the country of destination. To fulfill these duties, the recipient has to be registered for VAT purposes in said country. Retailer can be absolved from the duty to charge VAT only if he can state its customers VAT number (and fulfill some other requirements). However, as private persons cannot obtain VAT numbers, the supplier has to make sure that the transactions are taxed properly.
In order for the online retailers to registered for VAT in every EU country into which they have sold a single chocolate bar (or another product), the EU VAT legislation has established special simplifying rules for “distance selling”. As long as businesses does not exceed a certain turnover from such cross-border sales to other EU countries, they are not obliged to VAT register in the country of their B2C customers, but can charge local VAT in the country of where they send goods from. The simplification is that until a significant threshold is reached in a specific “target” country the retailer does not need to deal with the VAT compliance and VAT administration in that country. This supports smaller merchants by releasing them from additional administrative burden and from dealing with VAT rules in a foreign jurisdiction.
The “distance selling thresholds” are currently set between approx. EUR 35’000 EUR and EUR 100’000; you can find detailed information published and updated by the EU Commission on this page. If your the turnover from your company’s sales to a specific country is below the applicable threshold, you can issue your invoices with the VAT of the EU Member State where the goods are sent from – your company is most probably already registered for VAT there.
As soon as your company’s turnover exceeds the “distance selling threshold” in one of the EU countries you sell and ship your goods to, you will have to register for VAT there, and invoice your customers with local VAT. This VAT needs to be declared and paid to the tax authorities of the respective country. Please note that obligation for the VAT registration resolved on country by country basis – i.e. exceeding the sales threshold in one country does not cause immediate VAT registrations in all other countries.
Alternatively, you do not need to wait until the threshold is reached and may elect to register for VAT on voluntarily basis in the country where the goods are shipped to. This option might be exercised where the VAT rate in the customer’s country is lower than the rate of the country of dispatch, as it would have a positive impact on your margin. Of course this calculation should also take into the account the costs of VAT registration, VAT compliance, upgrade and update of the online shop and accounting software… Although these are the costs a successful online shop will be facing sooner or latter anyway.
Things to consider
If you are selling goods to private (or other non-VAT-taxable) persons established in the EU, you should consider the following:
- Know your customers: to whom are you selling your goods?
- Know your customers: where are they located and where are you shipping the goods to?
- What are the applicable “distance selling thresholds” in “target” the countries you are shipping goods to?
- Monitoring your YTD (year to date) net sales – how much goods have you already sold to which countries in the current calendar year?
- What are your VAT registration and VAT compliance obligations if your company has already exceeded the “distance selling threshold” in certain countries or is about to do this soon?
- How to calculate your gross prices considering the applicable VAT rate?
- Have you updated your online shop and accounting software accordingly and is your invoicing template set-up correctly?
- What to do if you have identified that you should have registered for VAT in a specific country too late?