What KIND OF TAXes ARE WE TALKING ABOUT?
Let’s start with VAT. In the European Union (EU), sellers collect a tax on behalf of the government and the buyer pays for the tax by paying a higher price. This sales tax in the EU is referred to as VAT which stands for Value Added Tax. EU Member States are required to apply a standard VAT rate of at least 15% and a reduced VAT rate of at least 5%. Currently, only Denmark does not have a reduced VAT rate. Some EU members have a 0% VAT rate on certain items. If you see a rate of 0% in the list below, it indicates that this rate does not exist in that specific country or the rate is simply 0%. There is a distinction between goods and services that are exempt from VAT and those that are subject to 0% VAT. We suggest you seek professional advice regarding your situation.
In the EU, each member state determines their own VAT rate. In general, countries that have a VAT system require most businesses to be registered for VAT purposes. VAT registered businesses are required to add VAT on goods and services that they supply to others (with some exceptions, which vary by country). They forward the VAT to the taxing authority, after deducting the VAT that they paid on the goods and services they acquired from other VAT registered businesses.
When we mention the EU, we mean the following Member States:
Belgium – Bulgaria – Croatia – Czech Republic – Denmark (except the Faroe Islands and Greenland) – Germany – Estonia – Ireland – Greece (except Mount Athos) – Spain (except the Canary Islands) – France (except French overseas departments, Saint-Pierre and Miquelon, and Mayotte) – Italy – Cyprus – Latvia – Lithuania – Luxembourg – Hungary – Malta – Netherlands – Austria – Poland – Portugal – Romania – Slovenia – Slovakia – Finland (except the Åland Islands) – Sweden – United Kingdom (except the Channel Islands and the Isle of Man)
All these Member States apply the same principle of VAT calculation. VAT is calculated as a percentage (VAT rate) of the price of the goods. The seller will calculate VAT based on either:
- the VAT rate of the Member State from which the goods are shipped to the buyer (which is usually the Member State from which the goods are bought) or;
- the VAT rate of the Member State into which the goods are shipped (in case of making sales to another Member State).
HOW DO I KNOW WHICH VAT RATE TO APPLY?
The VAT rate applied by the seller depends principally on the ‘distance sales’ thresholds for intra-EU Business to Consumer (B2C) supplies of goods.
Distance Sales: These occur when goods are sold, dispatched or transported to a private consumer (who is not VAT registered) who was not present at the seller’s store or business premises or who is located in another EU Member State where the supplier (or seller) is responsible for the delivery of the goods. It includes traditional means of communication such as press adverts accompanied by order forms, catalogue sales, and telephone. It also covers more technologically advanced means of distance communication such as tele-shopping, mobile phone commerce (m-commerce), and the use of the Internet (e-commerce). It also includes the case when several means of distance communications are used in any one transaction (e.g. internet and phone). It does not include sales of new means of transport or excisable goods. Digitised goods are considered to be services (goods that are downloaded via the internet).
So if you sell through an online store, you are distance selling.
Distance Sales Thresholds: The distance sales thresholds are different in each Member State, however, they are usually €35,000 or €100,000 (or the equivalent in local currency). You can find more information about the different thresholds here. A seller has to check the total amount (without VAT) of distance sales in any one calendar year and also in the previous one:
- if that amount is lower than the threshold adopted by the Member State of destination, the seller can apply the VAT rate of the Member State from which the goods are sent;
- if that amount is higher than the threshold approved by the Member State of destination, the seller can apply the VAT rate of the Member State into which the goods are sent.
For example, a Belgian business sells products via its online store to a private individual in Germany. The distance sales threshold in Germany is €100,000 and the German VAT rate is 19%. As long as the total value of annual sales in Germany is below €100,000, the Belgian business can choose to apply the Belgian 21% VAT. If the company decides to charge the German 19% VAT OR if the threshold is exceeded, a VAT registration is required in Germany.
So a VAT registration is required in the Member State of destination if you exceed the ‘distance sale’ threshold of that country OR if you want to apply the VAT rates of the Member State of destination to your product (regardless of ‘distance sale’ amount).
The principles mentioned don’t apply to supplies of second-hand goods, works of art, collectors’ items or antiques and second-hand means of transport, which have special arrangements.
WHAT IF I OFFER SERVICES INSTEAD OF PRODUCTS?
The general rule for determining the place of sale is the place where the seller of the services is established (or “belongs”), such as a fixed establishment where the service is sold, the seller’s permanent address, or where the seller usually resides. VAT is charged at the rate applicable in and collected by the Member State where the place of supply of the services is located. This general rule for the place of supply of services (the place where the seller is established) is subject to several exceptions. For example: The place of real estate-related services is where the real estate is located. Of course there are a lot more excpentions, so seek professional help for advice related to the service you offer.
HOW DOES FORMALNET.COM HELP ME WITH THIS?
Simply said, the seller charges VAT to the buyer, and the seller pays this VAT to the government. When you create a product in your online store on our website, you’ll see that you have the choice between several VAT ‘tax classes’.
- Reduced (Alternative)
- Super Reduced
Class ‘Zero’ is pretty easy to explain: it’s just 0%. For the other options it’s a bit more interesting. Since they’re all different according to which country you’re in. You can find the different rates for the different tax classes below. They’re all listed per country, so you know what tax class to pick for your specific product.
HOW DO ONLINE VAT RATES WORK?
When you create a product in your online store with us, you must enter the prices including VAT. You’ll also find an option where you will specify which tax class you applied to that product. We will do our best to keep these tax class rates as accurate as possible, so you always receive the correct amount of VAT. We do this by performing regular updates of our automatic calculator. These updates may not show up immediately in the rates given in the list below. But if you find an error or omission, feel free to contact us here. It allows us to make improvements and help your future sales in surrounding countries.
HOW DO I KNOW WHICH ‘TAX OPTION’ TO TAKE?
That depends on the type of product you’re selling. Some countries may give some VAT ‘discounts’ on certain products. Because they want to promote certain purchases (e.g. books) or they still use old VAT rates from times before the EU Rules & Regulations regarding VAT. For the most part, you’ll be selecting ‘Standard’ or ‘Reduced’. You can check this English PDF File of VAT rates applied in each country here.
We advise you to do your own research and seek professional help if you want to know which rate applies to your product.
DO I PAY A TAX ON SHIPPING?
Tax on shipping depends on the carrier you select for your shipments. It might be free of tax if your package is under a certain weight or size. But you should check this with the delivery company of your choice. You are completely free in how you get the product to your customers. You can even decide to deliver it yourself and demand a shipping cost to pay for your fuel.
To make it easy for everyone and to keep our system flexible, we decided to leave this shipping cost completely up to the seller. You can enter a percentage-based cost or fixed cost. For example: You set €10 as shipping cost. If you needed to pay tax to your delivery company, then you can regard this €10 with tax included. If you don’t need to pay tax, then you can regard this €10 with tax excluded or free of tax. This is again the responsability of the seller. If you select a percentage based cost, it will be calculated on your product price WITHOUT VAT. So if you sell a product of €100 incl. VAT and you select a 10% fee, you will not receive €10. You will receive a slightly lower amount since it calculates 10% of the product price excl. VAT.
ANYTHING ELSE TO CONSIDER?
Customs Duty: The single market involves the free circulation of goods, capital, people, and services within the EU. And the customs union involves the application of a common external tariff on all goods entering the market. Once goods have been admitted into the market they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally.
Excise Duty: is due when buying online alcoholic beverages, such as beer, wines and spirits or tobacco products in a European Union Member State. It is the responsibility of the seller to pay the Excise Duty due in the Member State where the goods are being sent to. For that purpose, he/she has to be registered, as far as Excise Duty is concerned, in the Member State of destination of the goods. In most Member States the seller needs to appoint a tax representative in the Member State of destination who ensures the duty payment in the latter. Excise Duty must be paid regardless of the quantity, even if the goods are a gift. If the seller does not pay the Excise Duty the goods can be seized by customs on arrival or the buyer (customer) may be held liable to pay the excise duties. Therefore the seller must ensure the excise duty payment in the Member State of destination. You should check with your national tax administration which has the competence in this matter.
Intrastat: Intrastat is the system for collecting information and producing statistics on the trade in goods between countries of the European Union (EU). Intrastat returns are statistical reports due in every Member States when the value of the goods arrived or dispatched from or to another EU country exceed the applicable threshold. Each Member State establishes an annual threshold value below which a business is not required to file Intrastat forms. The reporting thresholds vary from country to country and, within one country, may be different for dispatches (exports) and arrivals (imports). Ask a professional to see if this applies to you.
And, of course, apply any other local Rules & Regulations that you need to follow. Seek professional help for your specific situation.