Undoubtedly, VAT in the European Union is a complex issue and although we usually know how much to charge customers in our own country, it´s different when we have to charge VAT to customers abroad.
Therefore, one of the questions most often asked by entrepreneurs is: When do I have to charge VAT on overseas sales? Is there any way I can avoid charging my client VAT?
Today we are going to answer all of these above questions, we will discuss digital product taxes, we will explain in which cases we have to charge the tax rate established in our country, or that of our client’s country, and in which cases our clients can save on VAT (and the processing work this entails).
We will also introduce the small business VAT scheme that allows you to ignore VAT and avoid including it in your invoices, the Mini One-Stop Shop (MOSS) and the best option for offshore companies who are forced to obtain an intra-community VAT number in order to sell in the EU.
The country of consumption principle (according to which the applicable VAT is charged in the client’s country, instead of the company’s) was specially introduced to limit the tax avoidance practices of large companies such as Amazon or Apple.
Up until 2015, it depended on the companies country of residence to decide which VAT was charged on digital products (something that remains in force in the case of services to individuals, even if they are carried out digitally). For example, Amazon sold its e-books through its head office in Luxembourg, with a reduced VAT of only 3%.
To prevent Amazon from using this channel, which many other large companies also took advantage of, the EU Member States had the “brilliant and innovative” idea of transferring the value-added tax to the receiving country, without being aware that this was creating a real bureaucratic monster that has become a real obstacle to many small entrepreneurs international expansion.
Now, when you sell through a blog, website or similar to European customers, even if your country is outside the EU, you can quickly become a tax evader if you haven´t taken the appropriate measures or paid the respective tax to the right country.
In theory, due to the VAT being charged depending on the country of consumption, it means that you have to request a VAT identification number in the Treasury in the countries you sell your products to.
And not only this, You have to be able to identify the country from which your client is purchasing your products (which means meeting certain technical requirements on the web), as well as knowing how much VAT is paid in each EU country and paying it to the correct State every quarter.
This is the case with all sales of automated digital products to final consumers, i.e, to individuals.
If your client is a company and has a valid tax identification number (you are requiered to prove its validity), the reverse charge takes effect so you don´t have to charge VAT on these invoices.
[Footnote: Generally, the one who sells the products/services is responsible. Therefore, the reverse charge means that it is the customer who is responsible for paying the possible taxes (VAT, in the case in question).]
Luckily, the EU has recognised that carrying out all these steps poses great difficulties for small businesses and represents an insurmountable bureaucratic obstacle for SMEs and micro enterprises. It was for this reason that it introduced the MOSS scheme, (Mini one-stop shop) for VAT.
The MOSS scheme, the mini one-stop shop
This scheme allows companies within and outside the EU to register for VAT in a single EU country and pay the VAT amounts owed there. This country will deal with any possibles payments to the other member States.
However, this scheme (see the details and alternatives below) is still quite complicated and expensive, especially when dealing with small amounts (there may be SMEs that prefer not to sell abroad due to the high administrative and bureaucratic costs associated with it).
Therefore, according to advice from the European Commission, reforms should be introduced that stipulate that below the threshold of a turnover of €10,000, the country of origins VAT scheme may apply (attention: up until now, this is yet to be implemented).
If this recommendation comes to fruition, there would also be a second threshold for small companies who have an annual turnover of up to €100,000, these would have to be based on the VAT in the consumer’s country, but simplified schemes would be used to determine what countries these are.
Currently, as previously mentioned, the vendors of digital products are required to clearly identify the buyer through two factors: As a general rule these include the IP address and the invoice address (sometimes even the SIM card).
It´s important to remember that even with the special VAT schemes for small businesses the requierement of collecting VAT in the consumer’s country is still applicable.
So, if your company is based in the United Kingdom (a country in which you qualiy for the VAT scheme for small businesses if you have a turnover of less than 85,000 pounds) in digital products sales to other EU countries, you would be required to register for the one-stop shop scheme (or, alternatively, you could use a payment service provider).
You can only apply the VAT of the country of origin of your company if you sell your digital products within the United Kingdom only (or if you do not consider what you sell to be a digital product, something we will talk about further on in the article), i.e. you wouldnt charge VAT if you were part of the small businesses VAT scheme.
Once the consumer’s country has been determined the corresponding VAT must be calculated, which is different in each of the 28 EU Member States, and paid through one of the aforementioned procedures.
You can find a VAT table here including the different EU states, and as you will see there are quite a few differences, ranging from 17% in Luxembourg to 27% in Hungary.
It´s important to remember that you must preserve sale and customer information for at least 10 years. This information should include:
- the country to which the product has been sold
- The type of product
- The date of sale
- The local VAT
- The amount to be paid in local currency
- The date and method of receipt of payment
- The invoice
- The name of the client
- The information for determining the consumers country, i.e. their IP address and billing information
Both EU companies and companies outside of the EU are eligable for the MOSS scheme. I.e. even if your company isn´t in Europe, you are still requiered to register and charge VAT to your customers if you sell digital products.
Companies from the EU can process VAT payments and collections through their countries tax authorities (requesting an intra-community tax identification number).
Companies from countries outside the European Union must use tax advisors from a country in the EU in order to gain access to the MOSS scheme.
Solutions for VAT in the EU: Registration in the MOSS VAT scheme in Cyprus
The three most common EU countries to register on the mini one-stop shop scheme are Ireland, Cyprus and (until Brexit is set into motion) the UK. We will explain below how you can register in Cyprus through this service which is directly offered through Tax Free Today.
As previously mentioned, in all the EU countries to which your products are sold you can obtain a separate VAT number and pay this tax quarterly. However, the process is much cheaper when done through a single central body, which then transfers the VAT to the authorities of other Member States.
Cyprus in particular, being a classic tax haven, is doing very well in this sense since you can process everything from there without any complications and it can be done completely online.
Companies from outside the EU can register for VAT purposes in Cyprus and make all payments through this eurozone country. With the help of local tax advisors the whole process can be largely automated. It´s important to bear in mind that you will have to submit all the relevant sales invoices monthly to the firm in charge of the service, together with the identification of the consumers countries. The consumers country can be determined with almost all payment solutions.
The firm makes the VAT declaration on the basis of the monthly receipts from the company, the final amount of which is paid to the Cypriot State, which in turn distributes it to the other countries.
There are no expenses for registering in Cyprus for VAT purposes if combined with a service contract. The preparation of your tax returns depends on the total number of accounting records:
|from 0 to 49 monthly accounting records:||69,00 euro per month|
|from 50 to 99 monthly accounting records:||115,00 euro per month|
|from 100 to 199 monthly accounting records:||148,00 euro per month|
|from 200 to 299 monthly accounting records:||189,00 euro per month|
|from 299 monthly accounting records:||consult prices|
Compared to other alternatives such as payment platforms, with commissions of around 8% and 10%, this type of solution can be worthwhile from digital sales of already more than €4,000 a month.
If you want more information about this solution, you can contact us directly.
For VAT purposes, what is a digital product?
Apart from the VAT payment made through the MOSS process, we must also mention that there are certain possibilities to legally avoiding paying the VAT of the consumer’s country. For this, the first step is to examine a little more how the principle of the country of consumption actually works.
We are only requiered to pay the consumers countries VAT, instead of that of the countries where our companies headquarters is located, with the sales of purely digital products.
Digital products can be: e-books, downloads, web hosting services, telecommunications, broadcasting, payment communities, online tools, online games, web designs, online marketing, streaming, online research services, advertising and other products and services electronically offered to the final consumer.
The important thing here is to differentiate between automated digital products and non-automated digital products.
To apply the consumer’s countries VAT, the digital product must be offered in automated form.
The fact that the service is provided electronically, than, for example, a version made by people sent by email, is NOT enough for the VAT of the customer’s country to be applied.
Whats important is that it is an automated electronic provision of the product, i.e. that the (complete) product can be downloaded directly, without any intervention by the seller.
Effectively, this point gives rise to various legal possibilities of avoiding VAT. So, according to the UK tax authority, you are not requiered to apply the consumer’s countries VAT in the case of:
- Physical products, although it is processed electronically and in an automated manner (we will discuss VAT on physical products in a future article)
- Books in physical format, newsletter,…
- Coaching and consultancy services
- Booking tickets
- Advertising services
In theory, you can avoid charging your client VAT if you send an e-book as a gift for the purchase of a physical book. Or if you send the access codes for online services through regular mail. Of course, you will only be able to avoid charging VAT if your company is in a country where VAT is not charged (outside the EU) or if you are part of the VAT scheme for small business owners (discussed further on).
Although in reality, there is no need to complicate the situation and send anything by physical mail, if we look at the definition in detail we can see that the important thing is that the sale of the product does not require human attention, or only minimally. I.e. the product is not automatically downloaded after clicking the “buy” button or the customer doesn´t receive the digital product through an automated email.
The following table shows possible examples and exceptions:
|Service||Digital||Offered electronically||VAT of country of destination applied|
|PDF sent manually by email||Yes||No||No|
|PDF sent manually by email||Yes||Yes||Yes|
|PDF automatically downloadable from the page||Yes||Yes||Yes|
|Automatically downloadable stock photos||Yes||Yes||Yes|
|Photographs taken specifically for the client, automatically downloadable from the web||Yes||No||No|
|Live Webinar (event)||No||No||No|
|Recorded Webinar (product)||Yes||No||Yes|
|Online course composed of recorded videos and downloadable content||Yes||Yes||Yes|
|Online course composed of recorded videos and downloadable content, plus advice from a tutor||Yes||No||No|
|Digital content produced individually, eg. personal reports, medical reports, photographs, etc. …||Yes||No||No|
|Links to online content sent manually by e-mail||Yes||Yes||Yes|
We can therefore see that it is not enough to manually send a download link to a client (although it is if we send it as a pdf).
Ultimately, as soon as we upload the product individually and send it to each customer by email one by one, we no longer have to apply VAT from the consumer’s country.
Any more options? We could sell our digital products with advice through live webinars or with access to a private Facebook group to stop it being considered as an automated digital product.
As we can see, with a minimum amount of effort and with undoubtedly less work than what the MOSS VAT procedure entails, we can escape the country of consumptions principle.
Anyway, keep in mind that this doesn´t mean we are necessarily tax-free. Eventually, the services we offer may be subject to VAT. Although, in practice, we can avoid it with the sales of non-automated digital products as it cant be effectively controlled or imposed, since it is not even necessary to issue an invoice when working with individuals.
The special VAT scheme for small businesses
As previously mentioned, there are many countries in the European Union that offer small entrepreneurs the chance not to demand VAT from their customers. This option is totally voluntary and can be very appealing for entrepreneurs who don´t want to charge VAT on their invoices.
To be able to qualify for this scheme, you must lie below the billing limit stipulated by each State. I.e. once your turnover exceeds this limit, the country in which your company is located no longer considers you to be a small business, and you will automatically have to demand VAT from your customers like other businesses.
The special VAT scheme for small businesses exists for digital products sales, as well as for the sales of services or physical products.
There are only three countries in the European Union that DON’T offer this advantageous scheme designed to facilitate new entrepreneurs entries into the market, these countries include the Netherlands, Spain and Sweden.
As mentioned before, the special VAT scheme for small businesses means that you are not requiered to demand VAT from your customers, so there is not as much administrative work. This is because you dont have to make any tax returns or quarterly/ monthly payments (depending on the country your company is located in) to the Treasury.
On the other hand, not including VAT in your invoices also allows you to be more competitive since on average, in Europe, you can be around 20% (the VAT rate in the specific country) cheaper than other businesses without this having any implications on your profits.
These of course are not all advantages. Companies that decide to join this special scheme cannot recover VAT on the products or services that they acquiered. In addition to this and as mentioned previously, in the case of digital products sales to individuals outside of the companies country, they still have to demand VAT from the customer’s country.
The country with the highest limit within the European Union is the United Kingdom (almost 100 thousand euros), but they are unfortunately about to leave the EU (Brexit). For offshore companies that wanted to sell in the EU, England has been a good option as a country in which to establish a payment processing subsidiary.
And not only would the United Kingdom disappear but so would the Isle of Man, a property of the British crown but independent from the EU that until now has provided a great alternative to the constitution of British Limiteds. Companies located there could obtain a British fiscal number that would allow them to sell in the common space without having to demand VAT.
Therefore, the Isle of Man has always been very popular for making large-scale VAT-free purchases, such as of aircrafts and ships. Of course, because they were completely tax-free on their profits, they could also be used for many other purposes.
With your option of having Great Britain to rely on almost having disappeared (the exact consequences that Brexit will have in this regard are still unknown), you now have Latvia, Lithuania, Romania, Slovakia and Slovenia with a turnover limit of 50 thousand euros, Ireland could also be quite advantageous depending on what you sell, because if you sell physical products for example the billing threshold is 75 thousand euros.
Below is the entire list with each countries maximum turnover, before having to charge VAT.
- Austria: 30,000 euros
- Bulgaria: 50,000 BGN (around 25 thousand euros)
- Czech Republic: 1,000.000 CZK (around 37 thousand euros)
- Croatia: 230,000 HRK (around 31 thousand euros)
- Cyprus: 15,600 euros
- Germany: 17,500 euros
- Estonia: 16,000 euros
- Hungary: 8,000,000 HUF (around 26 thousand euros)
- Ireland: 37,500 Or 75,000 euros (the latter is applied in the sale of physical produtcs)
- Latvia: 50,000 euros
- Lithuania: 45,000 euros
- Luxembourg: 30,000 euros
- Malta: 35, 24 or 14 thousand euros
- Romania: 220,000 RON (around 49 thousand euros)
- Slovakia: 49,790 euros
- Slovenia: 50,000 euros
- United Kingdom: 83.000 GBP (around 98 thousand euros)
For those who want to avoid charging their customers VAT and want to take full advantage of this special programme, there are many options. You can therefore deliberately maintain a turnover below the threshold and set up several companies in different countries.
Of course, you have to take into account that in the retail sector (this doesn´t apply in the case of digital products or services), once you have exceeded the sales limit established by each country for the distance selling of physical products, you must obtain an intra-European VAT identification number and apply the VAT of the country to which you are selling to, regardless of whether or not you are part of the VAT scheme for small businesses.
So, all in all, what is the best VAT solution for online entrepreneurs?
As we have seen, despite the fact that VAT can be a big problem there are many different solutions to it, including some that allow us to completely avoid charging VAT.
For those who start an online business or don’t have a large turnover it is generally recommended to use intermediaries or sales platforms, since they take care of everything and also offer other very useful tools. Their transaction fees are quite high, but they aren´t so bad when you still aren´t selling much.
However, after obtaining a certain volume of monthly sales of digital products, it is worth considering other options. If you are already making around €4,000 of monthly sales, it may be worth registering in the MOSS VAT scheme (this is 8 to 10% commission of intermediaries compared to about 2% commission + a fixed amount of €200 for accounting).
Of course, it is even better to incorporate manual factors into your products and take advantage of the VAT scheme for small buisnesses, so that VAT will eventually not be applied. With an VAT of 20-25% in most countries, this is an important factor which will substantially increase your income.
Of course, in this case you will no longer be able to rely on the services of sales platforms, as they usually charge VAT automatically. Instead, it might be better to opt for a solution through self-managed payment gateways or use your own payment processing company.
Because your life is yours!