European e-commerce marketplaces reach a million consumers, and they are the quickest and easy way to extend our reach across Europe. Before diving in, you have to know that each has its pros and cons with its different set of requirements, prerequisites, target audiences and categories. The common thing between all e-commerce platforms is the merchant responsibility to comply with VAT and tax requirements in the continent’s different regions. If you decide to grow and expand your opportunities in the European market, you need to have a basic understanding of Value Added Tax (VAT).
What is VAT?
The European equivalent of the US sales tax is Value Added Tax (VAT). It is a consumption tax applied to nearly all goods and services that are bought and sold for use or consumption in the EU. That tax the VAT-registered traders add to the cost of the goods and services they provide. Then they have an obligation to declare it to the national tax authorities when they file their tax returns.
If you trade goods and services in any EU nation, you may probably be required to register for Value Added Tax (VAT) in some of the countries you trade-in. Of course, there are many exceptions and many times, you might only register in one of the EU member countries depending on where your legal entity (company) is established and obligated to be VAT registered according to its activity.
Calculating and charging VAT in the EU
VAT is charged as a percentage of a goods’ price on every distribution stage across the supply chain. How large a percentage is up to individual EU countries. According to EU law, EU Member States are required to levy a standard VAT rate of at least 15% and a reduced rate of at least 5%.
Most European countries set thresholds for their VATs. That means that if you have a turnover of taxable products and services above a certain value, you are obliged to register for VAT in the respective country. That threshold is different for each EU country. This registration threshold allows small organisations to save time and expenses in compliance.
Once registered for VAT, the merchant has the right to claim money back on their company expenses as well as import VAT paid at the time goods are imported into the EU. Through VAT tax returns, you notify tax authorities how much VAT you have collected and can claim back any VAT credit you have accrued.
When is VAT chargeable?
VAT is chargeable for EU-based companies on most sales and purchases of products and services within the EU. In such cases, VAT is charged and due within the EU country where the end-user consumes the goods. By the same token, VAT is charged on services when they are administered in each EU country.
VAT isn’t charged on exports of goods to countries outside the EU. VAT is charged and due within the country of import in these cases, and you do not need to declare any VAT as an exporter. Nevertheless, you will require to provide documentation as proof that the products were transported outside the EU when exporting such. That evidence could be provided by presenting a duplicate of an invoice, a transportation document or an import customs record to your tax authorities.
What do you need to register for VAT?
Here we look at VAT registration in the three EU countries that have the most extensive internet markets.
Register for VAT in the United Kingdom
You have to register for VAT in the UK if:
- You store goods in the UK.
- Sell your products and services to UK-based consumers.
- If you have reached the threshold of £85,000.
The standard VAT rate in the United Kingdom is 20%, but there is also a reduced rate of 5 % for goods and services like children’s car seats, electricity, natural gas and district heating supplies for domestic use. In the UK, the books, newspapers, household water supplies, domestic passenger transport, children’s clothing and footwear and some other goods are at an 0% VAT rate.
The best in the UK is that you can register VAT online on the HMRC (the UK tax authority) website. When you submit online, you will create a VAT online account (sometimes known as a ‘Government Gateway account’) that you will need later to submit your VAT Returns to HM Revenue and Customs (HMRC).
You can assign an accountant (or agent) to do this job and submit your VAT Returns and deal with HMRC on your behalf.
It takes 30 and sometimes more days to obtain a VAT certificate in one of these ways:
- to your VAT online account;
- by post – if an accountant registers VAT on your behalf or you cannot register online for some reason.
You require to provide details like your turnover, business activity, and bank details in the registration process.
The date of registration is known as your “effective date of registration”, and you’ll have to pay HMRC any VAT due from this date.
Register for VAT in Germany
You have to register for VAT in Germany if:
- You hold stocks in a warehouse in Germany.
- Sell your products and services to Germany-based consumers.
- If you have reached the threshold of €17,500 if your organisation is established in Germany, or the threshold of €100,000, your organisation is registered in another EU country.
The standard VAT rate in Germany is 19%, but there is also a reduced rate of 7% for goods and services like food, plants, and animals, books and newspapers, works of art, or entrance fees to cultural sites.
To register for VAT in Germany, you have to fulfil an application form, add a registration certificate, and provide information about the managers, organisation, and company’s expected turnover. Keep in mind that German is the official language and the tax forms are generally only available in German. Once all the information is submitted, the companies will receive a fiscal registration number.
When an organisation is first VAT registered, it is allocated to numerous German tax offices around the country. The allocation is based on the land of residency of the merchant. For example:
UK organisations – Hanover.
US organisations – Bonn.
The following documents are required to get a German VAT number:
- VAT certificate to prove the organisation has VAT registration elsewhere in the EU, if appropriate.
- Founding certificates of the company.
- Companies national trade register extract.
The German tax authorities sometimes are very demanding when it comes to VAT registration of foreign companies. They often ask additional questions to ensure that the organisation isn’t a fictitious company or part of carousel fraud. Be prepared that those testing processes can generally take several weeks for receiving a VAT registration.
Register for VAT in France
You have to register for VAT in France if:
- You hold stocks in a warehouse in France.
- Sell your products and services to France-based consumers.
- If you have reached the threshold of €82,200 if your organisation is established in France, or the threshold of €35,000, your organisation is registered in another EU country.
The standard rate in France (20%) is below the average standard rate in the EU (21.3%). There are also two reduced rates (5.5% and 10%), as well as a super-reduced rate (2.2%) for pharmaceutical products; some newspapers, public television licence fees, certain cultural events and some livestock intended for use as a foodstuff.
To register for VAT in France, you need to submit an application form to French tax authorities (Service des Impôts des Entreprises). You have to submit your registration within two weeks of the start of trading or reaching the VAT registration threshold. If you delay your French VAT registration, you will not be penalised, but there will be an interest charge on any VAT due.
The required documents to get the French VAT number are the same as for the German registration:
- VAT certificate to prove the organisation has VAT registration elsewhere in the EU, if appropriate.
- Founding certificates of the company.
- Companies national trade register extract.
Once an organisation has its French VAT number, it is free to commence trading, issue VAT invoices and charge French VAT. It has to observe the French VAT compliance rules and file regular returns.
Conclusions
In general, the market is free, but you will need to register for VAT in the country where you store your goods, sell to consumers based on the territory of the respective country, and your sales exceed the VAT threshold in that country. Once you have a VAT certification, you can issue VAT invoices, file VAT tax returns and claim money back on your business expenses.
Important. This material is in line with our mission to provide individuals, startups, social enterprises, micro and SME with support, understanding, education, and resources about market research, logistics and their online presence on the world’s largest marketplaces and search engines. It doesn’t constitute legal or accounting advice. Use this publication only for informational purposes and consult a qualified expert or attorney for professional advice for your particular case.
Sources:
- Edesk.com – European VAT for eCommerce explained in simple terms.
- Gov.uk – VAT: detailed information
- Avalara.com – VAT registration