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Blog post from October 21, 2020

EU VAT for digital products and services

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Are you a digital entrepreneur in the EU? Even if that's not the case, charge your customers in the EU VAT? At what tax rate? Was that even true? Was your client an end customer, a supplier, or a retailer? How do you store your invoices?

Questions about questions.

If you're reading this and worried that you have no idea how to answer these questions - or think you do but aren't really sure the answer is right - then this article is for you .

Of course, entrepreneurs monitor everything that goes on around them in order to be successful. But it is also essential for entrepreneurial success Government policies and regulations to fulfill.

This of course also applies to the VAT guidelines.

No matter how big the online business is, or what type of digital products you sell, you must implement EU VAT regulations carefully.

It doesn't matter whether you are in the EU or not.

Why?

Because you have to declare and pay VAT every time you carry out a transaction with a customer in the EU.

What happens if you don't do that?

It's simple: If you forget to add VAT when selling, you will have to pay it out of your own pocket.

EU VAT

This means that if your customer lives in one of the 28 member states of the European Union, you will have to calculate, collect and pay VAT at a later date when you file your tax return.

Unfortunately, the tax area is quite confusing for many people; If you are also unsure because the EU VAT processes are simply not transparent enough for you, you will be happy to know that you are not alone.

That's why we have here comprehensive advice compiled around the topic of EU VAT regulations for digital products and services.

Table of contents

  1. What is EU VAT?
  2. What is meant by a digital product?
  3. When should you charge EU VAT?
  4. Meet EU VAT requirements on digital products
  5. Step 1: Register your company for EU VAT
  6. Step 2: Check the customer location
  7. Step 3: Calculate VAT on transactions if necessary
  8. Step 4: Keep all detailed invoices and documents
  9. Step 5: File your tax return quarterly
  10. EU VAT rates for digital products by country
  11. How does the reverse charge process work?
  12. How does the Mini One-Stop Shop (MOSS) work?
  13. What happens if you don't want to use MOSS?
  14. Frequently asked questions (FAQs) about EU VAT

What is EU VAT?

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The Value Added Tax (VAT) is a consumer tax on services and products.

To put it simply, it is a tax applied to a good and is usually paid by the customer, not a company.

This means that each sale in the EU includes a certain percentage of the total cost that must be paid.

EU VAT rate in Europe

This percentage ranks between 17 % and 27 %, depending on which country the consumer is located in.

Therefore, as an entrepreneur, you need to be familiar with the respective national rules for different countries so that you can charge your EU customers EU VAT.

We will discuss this in more detail later.

What is meant by a digital product?

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A digital product describes a product that is in used, stored and delivered in electronic form becomes.

Such products include applications and files for download or products received via email, purchased on the Internet or accessed through a website.

Unlike physical products, digital products are immaterial, i.e. you can't touch them.

Their tax rules differ from those that apply to physical products.

Digital products are also called as follows: 

  • Digital services
  • e-products
  • e-Services
  • e-goods
  • eBooks

Sure, this definition sounds ambiguous. But this ambiguity is appropriate and intentional here.

As the world evolves, technological advancements also improve at a rapid pace. No other sector is evolving as quickly as technology.

Therefore, no limited, concrete definition can be used to determine exactly what digital products are, when at any time a previously unforeseen concept can come along and overturn the current definition.

So yes, digital products are categorized very broadly, and they all fall under a tax policy category.

These are the criteria that European Commission used to certify that a product is actually a digital product:

  • It is made available through an electronic network such as the Internet.
  • It is essentially IT based; the product or service could not exist without technology.
  • It is based on automation, meaning it requires little to no human intervention.
  • It is not a physical, tangible product.

The above characteristics may seem vague, but they provide a specific and at the same time broad spectrum.

Even with innovations still to come, where we will encounter digital products that we previously only thought possible in science fiction films, the above criteria are still specific and at the same time broad enough to ensure that all types of digital products will also be included in the future.

Here are some popular digital products we use today:

  • Films and series from service providers such as Netflix, HBO etc.
  • E-books, images, films and videos purchased as copies from Amazon and other online retailers
  • Site hosting service providers, websites and internet service providers
  • Software as a Service (SaaS)
  • Music for streaming or downloading, either ordered as MP3 or used through providers such as Spotify or SoundCloud
  • Games, either online or as a download

When should you charge EU VAT?

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Just like with physical goods, there are cases where you don't have to charge VAT.

Although VAT must be taken into account for every sale, under certain conditions you do not have to collect it from your customer.

It is therefore essential that every entrepreneur knows when to charge VAT. #

Basically it comes down to two main factors:

  1. Is the transaction B2B (company to company) or B2C (company to end customer)?
  2. Where is your customer located?

As a rule of thumb, as long as you run a European company, you must charge VAT in your home country.

Any sale of digital products must include VAT, which must be collected from the customer.

If you make sales elsewhere in the EU, the transaction falls into either the B2B or B2C category, as described below:

Category B2C

In this case, you normally include VAT and collect it from your customer.

As previously indicated, the VAT rate is not universal, and even within a country it can vary depending on how much you earn.

As long as a company less than 10,000 euros annually in cross-border sales of digital products within the EU, your own country's VAT rate can be calculated on all cross-border transactions.

Beyond this limit, the entrepreneur must calculate the VAT rate of the customer's country of residence.

Category B2B

In this case you must do not charge VAT.

The buyer pays VAT according to the Reverse charge procedure. This way, you don't have to file separate tax returns for each country you sell to.

As long as consumers give you their tax number during the transaction, they can pay the VAT themselves at a later date.

You should use the tax numbers of your customers VIES service check; more on that later.

Countries outside the EU

When it comes to Countries outside the European Union the matter is simple.

The reverse charge procedure is applied for B2B sales and for B2C sales, VAT is calculated according to the rate of the customer's country of residence.

Important facts about EU VAT

Meet EU VAT requirements on digital products

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The entire EU VAT jungle can be summarized in five steps. Entrepreneurs should deal with the following tasks: 

  1. Register your company with a VAT number!
  2. Check your customers’ location!
  3. Where necessary, charge VAT on transactions!
  4. Keep all detailed invoices and documents!
  5. Submit a VAT return every quarter!

Step 1: Register your company for EU VAT

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As you might expect, in order to legally do business in the EU, you must first register your business for European Union VAT.

Depending on which country you are registering from, this is a one or two step process.

Register your company with a tax authority in the EU

If your business is in the EU, you only need to register for VAT in your own country.

If it is outside the EU, choose one of the 28 countries to accept your tax declaration.

If the second is the case, contact them first Mini One-STop Shop (MOSS) of the respective country - this is a program that we will explain in more detail later.

Are you unsure about which EU country you should choose? No problem! Here are a few tips:

Tips for choosing the right EU country for your tax procedure

  • Choose a country that uses a common language

This way you can understand all policies, procedures and tax documents without a translator. If you are a native English speaker, select e.g. B. Ireland, but also other countries such as Spain offer English in their tax procedures.

  • A functional website

If you're in the digital world, you know how frustrating it can be to be bogged down by slow and unusable websites.

Although by law every EU member state must offer an online portal for the EU VAT MOSS, some are better than others.

We provide you with links to each country's MOSS page so you can decide which one is right for you.

One VAT number receive

Please note that a VAT number is different from a local tax number. The former allows international sales to other EU countries, while the local tax number only allows local transactions.

After you have registered your company, you will either automatically receive a VAT number - or you will receive a local tax number with which you can apply for a VAT number in a second step. 

Step 2: Check the customer location

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This is one of the most important steps to comply with EU VAT regulations during and after the sale.

Not only will this section explain everything you need to know about calculating VAT for your customers, it will also advise you on how much VAT to charge, when no VAT is due and provide other information you need for your tax documents. 

Once you have acquired a new customer in the EU, two questions arise:

Question 1: Is the customer a Pursue or a private person?

This is the first step to finding out if you need to charge VAT. Find out whether you are selling to another company or to an end customer!

This can be done by asking for your customer’s VAT number. Every company must have a VAT number.

If your customer doesn't have one, classify the transaction as B2C.

If your customer is a company (B2B), use the VAT number to verify whether the company is valid.

Why do you need to check this?

Because there are also fraudulent customers who provide a false VAT number to avoid paying tax. Use this European Commission audit toolto validate all VAT numbers! 

Question 2: Where is it located? Customer?

As mentioned, VAT rates are not the same in all EU countries. Therefore, make sure you check your customer's location to find out how much VAT you need to charge. 

Various documents can help with this.

Choose any two from this list:

  • The country that issued the credit card
  • The location of the customer's bank
  • The billing address
  • The IP address of the device the buyer is using
  • The country associated with the SIM card if the transactions were made on a mobile phone

Note: If you are below the 10,000 euro mark for cross-border sales, even one variable of customer location verification will suffice.

However, to ensure that this is legal, you must receive it from a third party, for example the bank or the IP address of the device used, and not from the customer themselves. 

In addition, you must keep this proof of location for at least ten years. This is required by law.

These documents provide evidence of your tax compliance. Store your digital folders either directly in your accounting software or use cloud-based storage!

Step 3: Calculate VAT on transactions if necessary

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Do I have to charge VAT? Here is a brief repetition of the guidelines described:

  • If you have an EU-based business that earns less than 10,000 euros annually, calculate the VAT rate of your customer's country of residence.
  • If your customer is located elsewhere in the EU and has a valid VAT number, you do not need to charge taxes; Your customer will do this themselves using the reverse charge process.
  • If the sale is B2B, charge VAT on sales in your own country.
  • If the sale is B2C, charge VAT on all EU sales.
  • Always calculate the rate that applies in the customer's country of residence if you have a business outside the EU and sell B2C!
  • If you sell for more than 10,000 euros per year within the EU, charge the VAT rate that applies where your customer is located!

Step 4: Keep all detailed invoices and documents

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Painstaking record keeping is part of the tax process. Let's look at the VAT invoice:

This is an important document that accompanies every digital sale to show all the details of a business transaction. It is essential for compliance with VAT regulations and helps with the organized processing of the tax return. It must also be issued if no sales tax is charged. 

What is included in a VAT invoice?

  • The name and address of your company
  • Buyer's name and address
  • Date of invoice
  • VAT rate applied
  • Credited VAT amount
  • Your company’s VAT number (if available)
  • bill number
  • Buyer's VAT number. If you use the reverse charge procedure, insert “EU VAT reverse charge” as text
  • Total amount including VAT

Preserve all invoices for at least five years in case you need to prove something at a later date!

If an EU institution asks for the invoice, all files should be stored digitally. This works easily and conveniently with our invoice management solution GetMyInvoices.

Read how to get yours Archive outgoing invoices quickly and clearly and automatically transferred to accounting software, billing applications or other solution!

Step 5: File your tax return quarterly

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The MOSS system, short for Mini One-Stop Shop, ensures that the final step is easy. Submit your return in the country where you are registered via its platform.

After you enter the countries where you made sales, the MOSS system automatically calculates how much VAT you have to pay.

This means you pay the full amount of VAT once - the system then divides the tax and pays it to the respective EU countries on your behalf. Even if you have 50 customers spread across 28 countries, you don't need to stress!

If you have a company based in the EU that has a turnover of less than 10,000 euros per year in the 28 countries, file your tax return in your own country.

Then you don't need the MOSS system. Your EU VAT return must be submitted at the end of each quarter within 20 days.

Here are the dates and deadlines:

  • 20th of April, for the first quarter ended on March 31 ends
  • 20th of July, for the second quarter ending on June 30th ends
  • the 20th of October, for the third quarter ended on 30. September ends
  • January 20th, for the last quarter ending on December 31 ends

EU VAT rates for digital products by country

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Digital VAT rates are not the same everywhere. They vary from country to country and range from 17 % to 27 %.

This means that you sell your e-books and videos to customers in France and Spain or other EU countries at different prices. But that shouldn't worry you, as your competition is also subject to the same laws.

The current EU VAT rates for all EU countries can be found in the following list.

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How does the reverse charge process work?

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Why don't you have to charge EU companies VAT? The procedure works like this:

In a typical B2B sale, a customer pays you VAT, you pay the VAT to the authorities, who in turn refund the amount to the customer after they claim the amount back as a tax break.

But the reverse charge process keeps the buyer responsible for paying and declaring VAT, leaving you out as the middle man.

Basically, it's a logical step to eliminate the back and forth. Therefore, you do not need to register for VAT in every EU country if you have B2B customers.

How does the Mini One-Stop Shop (MOSS) work?

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The system launched in 2015 to simplify the tax process for digital transactions. This happens because a company does not have to register for VAT in every country in which it has customers.

Simply check the MOSS registration process with your local tax authority in your home country (if you are not based in the EU, then in the EU country of your choice)!

The taxes are then processed as described here:

  • You only file a VAT return online via the MOSS platform.
  • The program calculates how much money you owe in total taxes.
  • The system then distributes the VAT accordingly to the EU states and their local MOSS offices.

It's that easy! In the complex world of digital taxes, MOSS is a breath of fresh air, to say the least.

Here you can access a list of MOSS websites for most European member states:

What happens if you don't want to use MOSS?

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First, you need to register for EU VAT in each country where you have a customer.

Then you must keep all necessary documents in accordance with the relevant local guidelines. You must file all tax returns individually, observing each country's deadlines.

Keep in mind that MOSS only works with companies that more than 10,000 euros per year implement!

Translated to a multinational customer base, imagine how much work that means? You would have to set up a separate department just for VAT!

Nonetheless, here are the pros and cons of both systems to help you decide:

Mini One Stop Shop (MOSS)

  • Less administration
  • A quarterly statement to the entire EU
  • Long record-keeping/retention requirements
  • Shorter deadlines for declaration and payment, within 20 days of the end of the quarter

Local VAT registration

  • Complicated
  • Tax declaration and payment deadlines depend on the respective EU country
  • Separate declarations for each country in which transactions were made; up to 28 declarations per quarter
  • Fast VAT refund
  • Regulations regarding the storage of documents depend on the respective EU country

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Frequently asked questions (FAQs) about EU VAT

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I have a company that deals in digital products. Can I be exempt from EU VAT?

All companies currently have to declare and pay their VAT in EU countries. Only European companies that earn less than 10,000 euros per year from cross-border sales of digital products in the EU are exempt from EU digital VAT.

Although the MOSS system is not intended for them, they must collect and pay taxes when selling digital products and services. 

I sell physical products online. Do I have to pay EU VAT?

This article only covers digital products. Different VAT regulations apply to physical products.

My company is not based in the EU. Do I still have to pay taxes?

Yes. VAT must be paid for every B2C sale or whenever the buyer cannot provide a valid VAT number.

If I decide not to comply with VAT regulations, can I still continue to run my business?

If you want to stay on the right side of the law, you must follow all guidelines. Failure to do so means risking non-compliance fines or back taxes for several years, which could be devastating to your business.

Do I have to comply with EU VAT regulations when selling my products and services through a marketplace?

Well-known online marketplaces for digital products such as Bandcamp, Envato, and Amazon Kindle Direct Publishing usually take care of VAT for their providers.

However, this is not the case with all marketplaces, which is why you should carefully check the company policies of each platform.

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