Let’s talk about VAT in Europe
As we know, each country independently sets the rates and features of VAT at the national level. The application and administration of this tax itself are quite complicated, so the European Community decided to unify the rules by adopting a number of Directives regulating the unified VAT system.
So we have good news if you are looking for VAT Germany, VAT Poland, or VAT in the EU — this article will hopefully help you understand.
Within the EU — unified rules are regulating the VAT system
Let’s look at the specifics of charging VAT with detailed examples and explanations because you definitely want to understand the whole mechanism and use it in your business.
Features of VAT in the European Union
- Only two rates of VAT apply — the standard and the reduced rate.
The standard rate applies to most services, while the reduced rate applies only to certain types, such as pharmaceutical goods, passenger transport services, medical equipment, etc.
- The minimum level of the standard rate is 15%, and the reduced rate is 5%.
And here’s a little more detail, the minimum level means that EU member states can’t set lower VAT rates than those specified in the Directive.
But! The maximum level of VAT (the limit) is not stipulated in the international treaty, and it is up to the states to decide on the amount of taxation. That is,
In Estonia, VAT is 20%, and under the directive, it will never be lower than 15%, but the country has the legal right to set it at even 30%.
- The general principle — the service consumed in the territory of the country is subject to taxation.
Thus, all service supply arrangements performed by a person subject to VAT in the territory of the EU are subject to taxation at the place of origin of the turnover (rendering of services). Accordingly, each company must keep track of its VAT obligations in each particular country where it operates.
Example: An Estonian company provides a subscription service to a streaming platform in France, and when invoicing individuals, it adds VAT at the French rate of 20%.
The place of turnover is determined by the Directive and provides for several options:
— the location of the company providing the service at the time of delivery, if the service is provided without additional transport;
— the final location where the service is provided to its purchaser (within the EU);
— the place where the company providing the service is located when the service is launched into civil turnover (in case of import).
- As a general rule, VAT has to be reported by the country where the service is provided.
- To have access to a single reporting and tax payment system, a VAT number can be registered in the EU.
Who can register VAT, and how does it work in the EU?
Resident companies carry out VAT-deductible transactions, and, in some cases, companies from third countries have this option. Having such a number allows you not to pay tax within the EU.
How does it work? Company A, which receives the service, is registered as a VAT payer and has a VAT number, then company B, which provides this service, issues an invoice without VAT. Then Company A marks the tax rate applicable in the country of registration and the right to a tax deduction in the declaration. Thus, the VAT rate will be 0% (in the case of B2B sales).
If two companies have VAT numbers, they are required to check them for validity in the registry, and if the numbers are valid, only in this case the 0% rate and reverse charge mechanism will be applied.
If the services are provided to a natural person (B2C) who does not have the status of a business entity and VAT number, then the person providing the service will bill the customer/buyer, specifying the amount of VAT in the rate of the jurisdiction in which that customer is.
Given the above rules, it becomes clear that the most advantageous and optimal option for VAT-paying companies is to obtain a European VAT number. Because then you can free yourself from an unnecessary tax burden, which, by the way, has quite high rates in European countries, namely:
VAT on electronic services and IT services in the EU
As of 2019, the rules concerning the VAT taxation of electronic services and those provided electronically (the most common among IT companies) have changed. The new regime is called MOSS (Mini-one-stop-shop).
Electronic services (e-services) are divided into 5 categories:
- Supply of video, music, games, lotteries, and other gambling
- Web site services — hosting, online storage, etc.
- Software services — e.g., software services provided over the Internet, software as a SaaS service, anti-virus software downloads, etc.
- Distance learning supplies — automated distance learning/programs, online textbooks
- Provision of text, images, and databases — design components, e-books, online book subscriptions, access to dating sites and applications, report downloads (e.g., from Statista)
Electronic services in the EU without VAT
In addition to the list of what is taxable in the EU, there is another list of tax-free services under the new MOSS regime:
- Services provided to businesses registered as VAT payers in the EU
- DVDs, CDs, memory sticks
- Professional advice provided by e-mail
- Development of covers or content for e-books, brochures, and other literature
- Online learning via the Internet (only with human intervention, automated software will be with VAT)
- Stand-alone transmission services
- Tickets for “live” cultural events, theatrical performances, plays, shows purchased online
If a company provides electronic services, it must register as a VAT payer under certain conditions. In such a case, the VAT rate of the country where the purchaser of the service is actually located is indicated when invoicing a customer-individual in the EU.
Example: You are a streaming eSports platform registered in Cyprus. In order to provide broadcasting and content monetization services within that platform to EU citizens, you need to register a VAT number. And if a customer from Sweden wants to buy access to your platform, you need to add a VAT of 25% (Swedish VAT) to the invoice, which the company will then pay through the EU single window system to the Swedish treasury.
VAT in the UK
From 1 January 2021, after the end of the transit period, the EU VAT Directives and the Union Customs Code ceased to apply to agreements between the EU Member States and the United Kingdom. For VAT purposes, the United Kingdom is now treated as a third country and will be subject to third-country rules from 1 January 2021.
In general, VAT regulation is very complex and requires considerable legislative research, as the Directives and international treaties provide for many nuances, exceptions, reservations. To know your VAT obligations — seek advice from Finevolution.