EU VAT Guide for Digital Subscription Businesses
Are you charging EU VAT and at the correct VAT rate? Was your customer a business customer or an end-consumer? If you’re implementing online payments for your digital goods and services business and need guidance, these are the rules.
The EU VAT rules we’re about to explain only apply to digital goods and services. These are telecommunications, broadcasting and electronic services (TBE), or officially called electronically supplied services by the European Commission. They do not apply to physical products, which have their own separate rules involving cross-border customs and taxes.
A digital product is any product that’s stored, delivered, and used in an electronic format. Your customer normally obtains them over the internet, by logging onto your website or via email after purchase. If you want to learn more and whether your product potentially falls into that broad definition, we’ve written a more detailed guide about what digital products are.
When Should I Charge EU VAT?
To answer this question precisely, you need to know
- who the transacting parties are and
- where they are located at.
It’s practically a necessity to ask for your customer’s country of residence during the registration or checkout process. Let’s start with the supplier’s side (you) since you’ll likely know more about yourself.
EU Business Selling Within the Same EU Member State
If you’re a business selling from inside the EU to a customer in the same EU member state, you always charge the VAT valid in your home country. You also charge VAT on every sale of a digital product and remit the VAT with every quarterly reporting period. It is up to your customer to determine whether they are eligible to claim back the VAT that they had been charged.
Example: A customer in the Netherlands signs up for a hosting service from a company also located in the Netherlands. Since the VAT rate in the Netherlands is 21%, the subscription’s net price of 60 EUR per year is increased by 12.60 EUR. The customer, regardless whether it’s a business customer or end-consumer, is charged 72.60 EUR a year.
EU Business Selling Across EU Member States
If the transaction happens across two EU member states, you have to mind differences in B2B and B2C. In B2B, you don’t charge a VAT because a reverse-charge mechanism applies whereby the buyer pays VAT to their own government.
Since business customers generally don’t pay a VAT, the VAT rate on digital products is simply 0%. To ensure, you’re actually dealing with a business customer, you need to let her input her unique VAT identification number, which you can automatically and instantly validate with Vatstack’s validation API. A customer’s valid VAT identification number is currently a formal requirement for applying the zero VAT rate to intra-Community supplies of goods.
Example: A business customer located in France subscribes to a SaaS operated by a startup in Germany. The French customer enters their VAT ID number which the SaaS’ system immediately validates. As soon as it is confirmed valid, the monthly net price of 39 EUR remains unchanged (no VAT is applied). For each quarterly reporting period, the German startup should validate all their customers’ VAT ID numbers to ensure that they continue to be eligible for a 0% VAT. Use Vatstack Batches, our bulk VAT ID number validation feature, to run through your customers’ VAT ID numbers on a regular basis.
In B2C, things look a little differently. You charge VAT to all customers. But the VAT rate depends on the size of your business and on where your customer is located. In January 2019, a new threshold to ease the regulatory tax burden of micro-businesses and SMEs came into effect:
- If your annual turnover for digital products sold in the EU is below 10,000 EUR, you can charge the VAT rate of your home country.
- Once you pass the 10,000 EUR threshold, you must charge the VAT rate of your customer’s country.
Example 1: An Italian customer buys an ebook with an ISBN priced at 10 EUR from a renowned marketplace operating in Ireland. Upon checkout, a chance to enter a VAT ID number is presented to the Italian customer, but because she is not a business owner, she does not enter one. The standard VAT rate in Italy is 22%, but Italy has a reduced VAT rate of only 4% for ebooks which carry an ISBN. The final price is therefore going to be 10.40 EUR (including 4% VAT).
Example 2: A Belgian customer signs up for an online course costing 500 EUR offered by a coach in Malta. The course materials are delivered to the customer automatically via online downloads and no one-on-one sessions are provided. This renders the course fully automated and it therefore falls under the category of a digital product. Since the coach has just launched the course, annual turnover is still below 10,000 EUR. She opts to benefit from the new VAT rules for micro-businesses and charges 18% VAT to all customers across the EU. The final price for the Belgian customer is 590 EUR (a competitive edge compared to the Belgian VAT rate of 21%).
You can refer to the European Commission’s current and historical VAT rates for every EU member state. We keep our standard VAT rates up-to-date and constantly monitor changes for various digital products. You may want to use our API for dynamically generated price quotes based on your business’ and your customer’s situations.
Non-EU Business Selling From Outside the EU
Businesses not situated in the EU have it slightly easier in terms of determining what VAT rate to charge.
- In B2B you should reverse-charge VAT, meaning that you don’t charge a VAT as long as a valid VAT ID number is presented by the customer. This means that you should implement some kind of real-time VAT ID number validation procedure into the checkout process. You also have to ensure that all customer VAT ID numbers are still valid with each quarterly reporting period for VAT remittance.
- In B2C transactions, you always charge the VAT of the customer’s country. The European Commission publishes current and historical VAT rates for each EU member state.
It’s worth highlighting that the non-EU supplier’s obligation to file VAT returns and pay VAT due arises with the very first Euro on sales of its digital products in the EU consumer market. Unfortunately, there are no exceptions to these VAT obligations, no de minimis thresholds for turnover or transaction volumes.
We’ll guide you through a few tax treatment configurations when you sign up, so you know the most relevant rules and can be VAT-compliant from the get-go.
How to Remit the VAT Collected From Customers
You’ve now been collecting VAT from your customers and the amounts are piling up. While this topic requires its own article, here are the basics:
Within 10 days of the first sale of your digital product to an EU customer, you must register with the tax administration of the EU member state where your customer resides. There are 28 countries in the EU (27 after Brexit, but that doesn’t help) and if you have customers across the EU, this quickly becomes a bureaucratic nightmare.
The EU has therefore introduced a so-called ‘Mini One Stop Shop’ (MOSS) scheme. This scheme lets suppliers submit quarterly VAT returns to a single tax administration of their choice and that tax administration will do the distribution of funds to each EU member state. There are two types of schemes:
- Union VAT MOSS for businesses based in the EU: You register for VAT to obtain a unique VAT ID number. Mind potential threshold allowances in your member state before registering. You can then activate that VAT ID number for VAT MOSS.
- Non-Union VAT MOSS for businesses based outside the EU: You register for VAT with a tax administration of your choice. English speakers generally prefer to register for VAT MOSS with the UK or Ireland. Since Brexit, the safer option is Ireland.
You then use their platforms to perform VAT reporting and remittance on a quarterly basis.
Always Store Pieces of Evidence
You must collect two pieces of evidence that confirm your customer’s location and keep them on file for 10 years. This evidence could be:
- the billing address of the customer (valid only if provided by a 3rd party)
- location of the customer’s bank
- country of credit card issuance
- the Internet Protocol (IP) address of the device used by the customer or any method of geolocation
- country of the SIM card (in cases where the purchase was made on a mobile device)
- the location of the customer’s fixed land line through which the service is supplied to him
- other commercially relevant information (e.g. product coding information which electronically links the sale to a particular jurisdiction)
If you’re a business in the EU with less than 100,000 EUR in cross-border sales of digital products annually, then you only need to collect one piece of customer location evidence. All evidence must be gathered from a third party, such as the bank or IP address, and not from the customer directly. After all, the customer could twist the facts to evade paying tax.
How Vatstack Automates Your Checkout Process
When you’re working on a checkout process, you can plug in Vatstack Quotes to automatically calculate the total price and the VAT due for every sale. It works seamlessly via API. It takes the tax treatment settings you had configured in your dashboard and matches it against your customer.
All you need to do is supply the API with relevant data about what your customer enters into your form. The API’s response contains all the information you need to charge the correct price. In order to be compliant and look legit to your EU customer, you would show the VAT rate determined based on their IP address and offer an input field for their VAT ID number.
If you want to learn more about the exact implementation, please check out our API documentation for Vatstack Quotes.