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EU-What?
A Solution To Your EU-VAT Problems

SaaS in Europe has been exploding in terms of both quality and quantity. The market, expected to grow at a compound annual growth rate (CAGR) of 25% during the forecast period 2018-2023, comes with tonnes of untapped potential for all business to rise and scale.

But if you are a SaaS business, or any business for that matter, trying to crack that European market wide open, you will understand the complexities that it comes with as well

24 languages, multiple payment preferences, VAT rules and rates, GDPR regulations, PSD2 compliance... it doesn't stop there. But finding a solution to a labyrinthine problem is a step by step process.

VAT Number, VIES, reverse charge mechanism, VAT invoices and returns, MOSS... all these terms might boggle your mind.

Enter 'The EU-VAT Guide' - The only step towards breaking down this complexity for your business

Let's get started!

The EU VAT Essentials

The Knowledge - What is VAT?

Before getting into the intricate details and the flow of things, you must address the elephant in the room.

What is VAT?

VAT is "Value Added Tax". But anyone can answer that.

What is VAT?

VAT is a consumption tax applying to all digital/physical goods and services. But I bet you can find this after browsing through a couple of pages on the internet.

How does VAT work?

Story of the VAT Chair

VAT Chair is not simply, a chair. It has a special purpose of making everyone understand VAT. There is an Oak company that sells raw Oak to a furniture maker for €100 + a VAT rate of 5%. It will charge the maker €105 and pay the tax amount of €5 to the government.

The furniture maker will sell the furniture to a store for €300 + a VAT rate of 5%. It will charge the store €315 and pay €15 - €5 = €10 to the government.

Finally the store will sell the finished furniture to its customer for €500 + a VAT rate of 5%. It will charge the customer €525 and pay €25 - €15 = €10 to the government.

Thus, the VAT is basically the tax imposed on the value added at each stage of the VAT Chair's story.

The Bigger Picture - Your SaaS business and VAT

Now that you have understood what VAT is, let's see how you fit in the grand scheme of things.

You are a business that sells certain goods/services to customers in the EU. You collect the taxes from them at the time of purchase and pay it to the government. You are essentially a VAT intermediary.

Sounds simple right? But this is where more problems pop up.

How will you know when to charge VAT? If you do, the next question would be, what EU VAT rate would you charge? What if your company is in one country and your customers are in another country? Which country's VAT rate do you charge then?

There are 28 member states with different EU VAT rates ranging from 17% to 27% along with the reduced rates, special rates and zero rates.

How do you validate the location of your customers? What are the details that you need to account for? From keeping invoices compliant to submitting VAT returns regularly, this process gets more and more messy.

The Product - VAT for Digital Goods

Before we help you untangle yourself from the entanglement you just saw, let's talk about the goods that you are dealing with here.

If you are someone who sells products through emails, websites, internet... anything under the umbrella of digital platforms, then you serve digital goods.

And to make that umbrella bigger, and to provide room for digital innovations, the European Commission has laid out a few conditions for a product to be considered digital:

  • It is not a physical, tangible good.
  • It's essentially based on IT. The offering could not exist without technology.
  • It's provided via the Internet or an electronic network.
  • It's fully automated or involves minimal human intervention.

All Cloud-computing software and SaaS, Online music/movie streaming platforms, Online games, ISPs, Websites, e-books fall under this category and this list grows as we speak!

With these prerequisites in your arsenal, let's solve that problem right away!

How to comply with EU VAT for digital goods?

EU VAT can get complex and tricky, but we have broken it down to five steps which will simplify the whole process for you and your business.

  • Registering your Business in EU
  • Verifying your Customers
  • When do you charge VAT?
  • Keeping VAT Invoices
  • Submitting VAT Returns

Step 1: Platform 9 ¾ - A Portal to Cross-Border sales in Europe

Registering for EU VAT is like getting invited to Hogwarts.

You will receive a magic ticket, or in this case, a VAT number. This ticket opens up a portal for you to platform 9 ¾, or in this case, cross-border sales to other member states.

This is a very crucial step for every SaaS business that's testing the Europe market for the first time.

If you are an EU business selling only within the home country, you need to register with the local tax authority but don't need to register with VAT MOSS.

But if you are a non-EU business, that is, a business established in a non-European country scaling into Europe - regardless of whether you sell in one country or more - you must opt for the VAT MOSS (Mini One-Stop Shop) Non-Union scheme. Every EU member state has its own VAT MOSS portal. The choice of registering with a MOSS portal can be based on where your customers are, the ease of communication in that country, or even the simplicity in using the country's MOSS portal.

If you are a subscription business based in any of the member states, you can do either of two things. You can register for VAT with your local tax authority in your home country, or you can register for VAT MOSS Union scheme.

Mini One-Stop Shop is an online portal that helps you combine every single one of your EU VAT into one single tax return, as quarterly filings.

Let's say that you are a business in Spain, but you have customers in Germany, Belgium and Austria. If not for MOSS, you would have to pay the VAT returns to each of these countries separately, in their currency. But if you are registered with the Spain MOSS system, your MOSS portal calculates how much VAT should be returned to each country, and also distributes it for you.

Step 2: The Million Dollar Question - How to verify your customers?

Now that you have your business up and running, the next step would be to figure out who your customers are, and where they are from.

By asking 'who' your customer is, you are trying to find out if the buyer is a business (B2B transactions) or a consumer (B2C or Business-to-Consumer transactions) and to see if you need to charge VAT or not.

And how do you do that? The Magic Ticket plays its part again.

If your customers are a business like you, they already have their VAT numbers. All you need to do now is verify if they are really a business. Why? Because they can pretend to be a business just to avoid taxes, and you will end up paying them.

You can verify their EU VAT number if they are a business, using the VIES portal - the European Commission's official VAT validation tool to lookup the VAT number of all businesses.

If your customer does not have a valid EU VAT registration number, you can consider the transaction as B2C.

Asking your customers 'where' they are from determines how much VAT you charge. You need to collect two pieces of evidence from the following options if your business sells more than €100,000 on cross-border sales annually. If you sell less than that, you need to collect only one piece of evidence from the following (marked with a '*'):

  • The billing address
  • Location of the customer's bank*
  • Country which issued the credit card
  • The IP address location of the buyer's device*
  • Country of the SIM card (mobile purchases)

You must also store this data for at least 10 years to show that you are EU VAT compliant. I would place my bet on a software that could store this data digitally.

Wondering how Chargebee does location validation?

Step 3: The Trade Secret - When to charge VAT?

What lies between a business and its customer, is a trade. Prior to that, both the buyer and the seller must understand how much they should give or take.

The EU-VAT Flowchart

If you are a SaaS company that serves businesses established in the same country as you are, charge the EU VAT rate of your home country. If these businesses are from other EU member states with a valid VAT number, you don't need to add tax. The reverse-charge mechanism takes care of this for you.

Reverse-Charge Mechanism?

Remember the part where you are essentially the tax intermediary? The reverse-charge mechanism unravels this for you. The responsibility for tax reverses from your business back to the customer, so that the tax money goes directly from customer to the government.

With reverse-charge now in place, the customers can just keep the VAT you charge them, and just file the paperwork for that tax. Now, that's efficient.

If you are a non-European B2B model, get registered right away! (refer to Platform9 ¾)

If you are a B2C SaaS company, you always charge VAT to your customers. Add the tax rates of your customer's country. You can charge the customers the VAT rate of your home country, if your annual sales in EU is less than €10,000. However, this is not a mandatory rule.

Also, you would have noticed a difference in charging tax for TBE services and others. But what is the difference between these B2C services?

TBE Others (Non-TBE)
Telecommunications, Broadcasting and Electronic services. Services which use the internet only to facilitate the sale.
SaaS, Web-hosting services, Downloadable software licenses, Online Subscription businesses, Advertising space on websites, etc., Ordering and processing of sales of physical goods like books, newspapers through electronic platform, Online courses, Ads in Newspapers, television etc.,

The following section contains the standard VAT rates put forth by the EU VAT directive.

However, there are some supplies pertaining to public interests like education, financial and medical services, that are exempt from VAT.

EU VAT rates

Here are the standard VAT rates of all the EU member states.

EU-VAT Rates

Read more about the reduced and special VAT rates

Let us take a look at a few scenarios to understand this better.

Scenario 1

Let's see how the EU VAT rules would apply to a subscription business established in the UK.

B2B sales

There are three possible scenarios -

  • If a customer is based in the UK, VAT is charged at the UK's rate.
  • If a customer is based in another EU country, no VAT is due if a valid VAT registration number is provided by the customer.
  • In this case, a reverse charge mechanism is applied and the customer would be required to pay VAT to their government at the VAT rate of their own country.
  • The seller must record the payment with all the details including customer's VAT registration number and submit it with their EC sales list (a list of supplies made to VAT registered businesses in other EU countries).
  • If a customer is based outside the EU, VAT is not charged.

B2C sales

TBE Services

  • If a customer is based in an EU member state, VAT is charged at the customer's country rate.
  • If a customer is based outside the EU, VAT is not applied on sales.

Others (Non-TBE)

  • If a customer is based in the UK or any other EU member state, VAT is charged at UK's rate.
  • If a customer is based outside the EU, VAT is not applied on sales.

Scenario 2

Let's see how the EU VAT rules would apply to a business established in a non-EU country and the customer is based in the UK.

B2B sales

  • VAT is not applied on sales.

B2C sales

TBE Services

  • VAT is charged at the UK's rate (the customer's country).

Others

  • VAT is not applied to sales.

Read more about how Chargebee calculates your tax

Step 4: Keeping Tabs - EU VAT Invoices

You are completely VAT compliant only if you have something to show for it. Keeping invoices is vital for complying with EU VAT.

What is a VAT Invoice?

A VAT Invoice is a document issued by a company/individual that supplies taxable goods/services in the EU, comprising all the information as prescribed by the EU VAT rules.

According to the European Commission, the EU VAT invoice cannot be a run-of-the-mill invoice. You must include the following details as well:

  • The date of issue of the invoice.
  • An invoice number that's unique and sequential
  • Seller's VAT identification number
  • Consumer's VAT identification number (in case the consumer is liable to pay tax on the supply)
  • VAT rate applied
  • Total amount payable
  • Full name and address of the seller and the consumer
  • Date of supply of the goods or services if it's different from the invoice date
  • Consumer's full name and address
  • Description of goods supplied and services rendered

However, if the invoice value does not exceed €100, a simplified invoice can be issued by taxable entities, it must include the following:

  • Date of issue
  • VAT amount owed
  • Nature of goods supplied or services rendered
  • Information on the identity of the seller

You are also required to store this data for a minimum period of 5 years. Now where can you find a tool that stores countless invoices that involve several complexities?

See how Chargebee handles recurring invoicing

Step 5: I Dutifully Report - EU VAT Returns

A VAT Return is a declaration that businesses give the tax authorities in their registered home country in EU.

Submitting/Filing a VAT return helps you with two things, it reports the amount you are due to pay, and also the amount you can reclaim. It is important to submit VAT returns every month/quarter/year based on your member state.

In rare cases, returns are also made on an activity basis for companies that are involved in irregular trading.

According to the EU VAT directive, you must report the following information in your VAT return:

  • Total sales and purchases
  • VAT owed
  • Amount of VAT to be reclaimed
  • VAT refund due
  • Businesses must submit a VAT return even if there's no VAT to pay or reclaim.

If you are a business selling to more than one EU country more than €10,000 annually, here's a hack!

VAT MOSS

All you need to do is submit one single VAT return to your MOSS portal online.

The MOSS calculates how much money you owe in taxes to each country and distributes VAT appropriately. It's a one-and-done process.

If you are a business selling less than the mentioned threshold, you can register with the local tax authority of your customer's country, bypassing VAT MOSS.

Businesses registered for VAT MOSS will be required to make quarterly returns and provide the gross value of sales made in each EU country, according to the following schedule -

  • Returns for the first quarter (1st January-31st March) - By 20th April
  • Returns for the second quarter (1st April - 30th June) - By 20th July
  • Returns for the third quarter (1st July - 30th September) - By 20th October
  • Returns for the fourth quarter (1st October - 31st December) - By 20th January
  • If no supplies have been made to consumers in EU countries in a given quarter, a 'nil-return' will be required.

EU VAT - In a Nutshell

  • Make sure that you are registered with your country's tax authority, and get a valid VAT registration number (also known as EU VAT Identification number or simply, VAT number).
  • Know your customers - find out if they are a business or a consumer. You can do this using the VIES validation tool by the European Commission that is used for checking VAT number of your customers. And store all the customer information for at least 10 years.
  • Know when to charge EU VAT to your customers, use our flowchart to understand the process. You can also check the different VAT rates using the European Commission's official document. There are Standard rates, reduced rates and special rates as well, so don't get confused.
  • VAT Invoices and VAT returns are mandatory. Always include VAT in your invoices, even if it is zero-rated. Submit VAT returns on a monthly/quarterly basis or even annually.
  • Once registered in another country, do not charge VAT for your own country as well as the customer's country. VAT should only be charged once.
  • It can take approximately 6 weeks to obtain a VAT registration, depending on the country that you are registering in.

Chargebee: Making your EU VAT problems easier

All said and done, EU VAT is complex and ever-evolving. And it requires a lot of research and learning to get it right. Chargebee makes sure that your subscription business complies with the latest EU VAT regulations with minimal hassle.

Smart Tax Calculation for Any Scenario

Chargebee handles EU VAT based on the type of your subscription business.

If you are a business selling digital services to one member state, then Chargebee applies the tax rate accordingly. Digital services, on the other hand, sell to multiple member states in the EU. In that case, businesses can register with VAT MOSS (Mini One Stop Shop). Chargebee simplifies the VAT collection process by collecting the tax rates defined by VAT MOSS.

If you aren't a VAT MOSS registered business, then you get the flexibility to select countries you want to sell to and Chargebee will apply a tax rate based on the billing address.

Location Validation (For Digital Services)

The VAT has to be charged based on the customer's location. The primary source for the customer's location is the 'Country' field present in the billing address. Whenever a customer signs up with you, Chargebee verifies it against the country the IP address is point to or the country determined by the Card BIN of the customer. An error message is shown if the location is not validated. The customer will not be able to complete the order unless the number is validated.

VAT Number Validation

For a transaction to be considered B2B, a valid VAT number has to be provided by the customer. When a VAT number is added or updated to an account, Chargebee sends this number to the European Commission's VAT Information Exchange System (VIES) and validates the number.

Chargebee will validate the customer's VAT Number during subscription renewals if the number has not been validated in the last three months.

If VIES server is down, Chargebee will store the VAT number and reinitiate the validation process every 24 hours. If it is found valid, the VAT charge won't be applied. Otherwise, VAT will be applied to the upcoming invoices.

VAT Consultation Number

You may have to prove to the Tax Administration of a member state that you have verified the VAT number while collecting it from the customer. In that case, a special VIES validation is required. Whenever a VAT number is validated, VIES generates a consultation number. Chargebee pulls this number from the VIES system and stores it. The customer can export the list when needed.

EU VAT Compliant Invoice

With Chargebee, you can send invoices that are compliant to the EU regulations. By setting up the template once, you are ready to go. An EU VAT Invoice sent to a customer contains the following information:

  • Merchant's trading name and address.
  • Merchant's VAT number.
  • Invoice date.
  • Buyer's name or trading name, and address.
  • The invoice contains the applicable VAT rate for each line item and a subtotal amount before applying VAT and a final invoice amount after VAT is added.
  • A VAT exemption note in case the end consumer is a business.
  • VAT amount presented in local currency

VAT Exemption Notes

There could be instances where a business customer does not have a valid VAT number, say when their sale is below the VAT threshold or their VAT validation status is found to be INVALID when VIES database is yet to be updated. In such cases, if you validate the customer as a legitimate business, Chargebee allows you to intervene manually and apply reverse charge - with or without a valid VAT number.