A New EU VAT Regime
Finally, the VAT headache for E-Commerce is over
For e-com entrepreneurs engaged in the online sale of physical products (such as, for example, those in the nutra or health and beauty verticals) selling products to EU consumers always meant dealing with complex and burdensome VAT obligations. In fact, for many e-com companies, the headache of having to register for VAT and file quarterly VAT returns in every separate EU country where you deliver your products, was enough to keep them away from the EU. After all, EU authorities are very strict on VAT compliance and taking your vat obligations not seriously is begging for trouble.
What were the rules prior to the 1st of July 2021?
Before the 1st of July 2021, e-com companies which wanted to sell products to EU consumers were generally obliged to pay VAT in the country where their consumers reside, unless their overall yearly sales in that country remained below an applicable threshold (many countries upheld a yearly threshold of EUR 35.000,-). But if your sales exceeded this amount, then you were obligated to apply for a VAT number in the country where your consumer resides and to pay VAT in that country on a periodic basis. The problem is that an e-com company may sell products to consumers living in twenty different EU countries. This meant that you had to register for VAT (which means apply for a VAT number) in twenty different countries, periodically file for VAT in 20 different countries, pay VAT in 20 different countries and deal with all the administrative hassle that comes with filings in 20 different countries…
Granted, there were service providers which assisted you with obtaining all the VAT numbers and doing the actual filings in the multiple countries, but of course this would cost money. You would have to pay such service providers a fixed fee for getting you the VAT numbers and doing the actual filings. In addition, you would have to pay them for any time they spend on potential issues with VAT inspectors and tax agencies in the many countries (if you are dealing with 20 different countries, there will be VAT investigations and issues). Plus, you would have to engage in steady communications with such service providers to continuously provide them with your revenue figures and other applicable information in every concerning country. In short, selling to EU consumers meant relatively high costs and headaches.
What are the rules now?
So, what happened on July 1st? From the 1st of July 2021, the yearly turnover thresholds (the above mentioned EUR 35.000,-) have been abolished and you will generally have to pay the due VAT in every EU country where your consumer resides regardless of your local revenue. Though this clarifies matters (subject to a small exception mentioned below) it’s nothing to get excited about. Then what are you supposed to be excited about? Simple: since July first, you no longer need to register for VAT and file VAT returns in every single separate EU country where you deliver products to your consumers. That administrative nightmare is over. No more paying people in various countries to do your VAT filings. No more communication with multiple accountants in different countries about your sales figures. No more. Since July first, if your company sells products to EU consumers, you can register and file all of your due EU VAT in one single EU country through a new online system called the One-Stop-Shop (the OSS).
What do you need?
So, if you are (for example) a US company, you can set up a local EU entity and register for VAT in that entity’s EU jurisdiction. You can then use that entity’s VAT registration to simply file the due EU VAT over all of your EU sales to all your EU consumers in any EU country. You do one quarterly VAT filing and you pay all of your due EU VAT to the tax agency of the jurisdiction where your EU entity is located. This tax agency will then in turn make sure that the paid VAT is divided properly over all the EU countries where you have sold your products. It’s now their headache and no longer yours.
Alternatively, if you do not wish to set up an EU company, you can engage a so called ‘fiscal representative’ in one EU jurisdiction to cater for all your VAT obligations through the OSS. However, fiscal representatives cost money and the expenses commonly exceed the expenses related to maintaining an EU entity. Fiscal representatives will also require you to park a hefty sum of money with them as their security. After all, fiscal representatives will be on the hook for your VAT payments and if you are suddenly nowhere to be found they will be held liable for the due VAT. Obviously, they like to make sure they are covered for this risk and therefore they will ask you to (at all times) park a nice chunk of money with them as security. For these reasons, it is commonly much more advantageous to set up your own legal entity in the EU and cater for your own VAT filings. A significant further advantage of using your own EU entity instead of a fiscal representative, is that you will maintain full control over your own VAT position, strategy and liabilities. Since VAT can relate to large amounts of money, companies commonly prefer to keep the control over their VAT ecosystem in their own hands.
One exception
There is one exception to all of the above for so called small entrepreneurs. If your company is based in an EU country and your total EU wide revenue in the current (and previous) calendar year is less than EUR 10.000,-, the basic rule requires you to pay VAT in the country from where your goods are being dispatched (usually the EU country where your business is located). Small companies may nevertheless still choose to use the OSS system and pay the VAT due in the country of their consumer, but this would be an option and not an obligation.
Starks Legal is a boutique law firm in Amsterdam specialised in e-commerce. For any questions or inquiries, please reach out to marianne@starkslegal.nl.