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European VAT: What companies need to know

by Editorial Office

Customsduties are the same throughout the European Union. But what about VAT? Who needsto pay? And which tax exemption limits apply? In this article we answer thefour most important questions concerning European VAT.

What are the legal requirements for Value Added Tax (VAT) in the EU?

Within the EU, VAT rates are clearly defined and regulated. Even if themember states can set the tax rates individually, they are contractuallyobliged to set a minimum tax rate of 15 percent. In addition, a reduced taxrate can be set for defined categories such as books and food or for restaurantvisits. However, it should amount to at least five percent. The further organizationof taxation is at the discretion of the member states. This explains why thetax rates vary between 17 percent VAT in Luxembourg and 27 percent VAT inHungary. The top e-commerce nations Germany, France and Great Britain are inthe midfield with 19 and 20 percent VAT respectively. For the EU, VATcollection is of particular importance. The contributions from member states tothe EU budget are calculated based on VAT revenues.

Who needs to pay VAT?

Generally, all companies in the EU need to pay VAT. For example, dealers need to register for VAT if they: 

  • import goods into the EU or transport them within the EU,
  • buy or sell goods or services in an EU country (this also applies to the sale via online shops or catalogs),
  • operate warehouses in an EU country,
  • participate in trade shows, conferences or trainings (with costs)

Generally, companies are obliged to pay VAT for almost all sales (there are exceptions in many EU countries, such as public transport): When selling goods, services, resources, logistics etc., companies must pay taxes in the state in which they have sold their goods or services.

Which VAT thresholds apply in the EU?

Different VAT thresholds apply in the EU. If the turnover of a company is lower than the threshold, it is exempt from VAT. The exact VAT thresholds are usually set by each EU country in the last quarter of a year. Subsequently they apply for the entire year that follows. In the United Kingdom, the VAT threshold currently equals 70,000 pounds, in Germany it is 100,000 euros. In France, companies need to pay VAT starting at a taxable turnover of 35,000 euros.

Example: In 2018, an American company imports goods worth a total of 100,000 euros to Germany. Germany sets a VAT threshold of exactly 100,000 for 2019. As a result, the company is required to declare VAT as of January 2019. 

If the company had only imported goods worth 50,000 euros in 2018, it would not yet be subject to registration. If sales in 2019 turn out to be better than expected; the company can already record imports totaling 90,000 euros in August 2019 and will again be importing goods worth 25,000 euros from the USA in September, it will be required to apply for VAT starting in September 2019, as the VAT threshold of 100,000 euros was exceeded this month.

In the process of selling, the tax is usually allocated to the consumers. In the EU, it is therefore common practice that the tax is included in the consumer price. Nevertheless, regardless of whether the regular rate or a reduced rate applies, it must be shown transparently in the billing process.

How does a VAT registration work?

Once a company is subject to taxation, it must apply for a VAT number. This is valid only in the country in which it was requested. If the company wants to trade in different EU countries, it must request a VAT number in the respective countries. Since the VAT registration is a national matter, the required documents in the individual EU states may differ. To avoid delays, it is advisable to consult a specialist. The latter can be appointed externally, for example as a fiscal representative. If companies make use of this option, the documents to be submitted include the Letter of Authority or Power of Attorney. This states that the appointed contracted provider may represent the company in tax matters.

Other required documents may include information on the tax registration in the home country, a proof of existence issued by the national authorities (registration in the commercial register or an equivalent) or even the company’s own Articles of Association. In addition, information about planned business activities must be disclosed and information about existing contracts or agreements must be provided.

If the competent authority has all the required documents, it generally takes two to eight weeks before companies receive a tax number.
For companies that are new to the European market, it is difficult to keep track of the large number of legal regulations in European taxation and customs. The country-specific differences especially can pose a major challenge. Service providers such as Hermes International, a division of Hermes Germany, support companies throughout the VAT registration process. Further, they provide advice to their customers regarding all customs issues.

Aninterview with the customs expert Thomas Gau on “Selling in the EU: Thingsyou need to know about VAT and customs” can be found here.

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