EU-VAT rules dropshipping: Everything you need to know!

1. When is VAT on dropshipping transactions due?

Regular VAT

If you operate in dropshipping, and would like to determine whether VAT is due on a given transaction, you will need to determine the place of the product supply. If your supplier is based in China and ships to the EU, no VAT will be due as the place of supply is where the goods are shipped from. Normally, if the place of supply is outside of the EU, no VAT is due.

Import VAT

Even if no regular VAT applies to your dropshipping transaction, your product may be subject to import VAT. Previously, import VAT was only charged on products exceeding a certain value threshold, typically between €10 and €22, depending on the country.

On July 1, 2021, the VAT exemption for imports of goods worth no more than €22 disappeared. As a consumer, you must pay VAT for all goods you import into the EU from July 1, even if you purchase them online.

2. Who is responsible for collecting and paying VAT?

If standard VAT applies, you must add VAT to your product’s price, and the customer is responsible for paying it to you. Once collected, you are then required to remit the VAT to the appropriate government authority.

For import VAT, responsibility depends on who is designated as the importer of record. If the customer is the importer of record, they are responsible for paying the import VAT. If your business is the importer of record, then you are responsible for this payment.

3. To what countries should VAT be paid?

Regular VAT should normally be paid to the country where the taxable place of supply is located, and import VAT needs to be paid to the country where the goods are being delivered.

The VAT rates of the EU countries differ significantly. Luxembourg has the lowest (17%), whereas Hungary has the highest (27%).

Are you based outside the EU? Learn more about the applicable rules here.

4. Do dropshipping companies need to be VAT registered?

Your dropshipping business needs to be registered for VAT in four cases, i.e.:

1. You carry out the supply of services or goods taxed with VAT.
2. You make an intra-EU acquisition of goods.
3. You receive services for which you are liable to pay VAT.
4. You supply services for which your customer is liable to pay VAT.

Registering for VAT will give you a VAT registration number, which can identify you as a taxpayer. Each EU country is responsible for issuing its VAT numbers, so you may be required to obtain them in different countries. A VAT number always begins with the code of the country that issued it, followed by several digits and characters.

The tax authorities of the EU countries always issue VAT numbers. Many private companies offer to obtain VAT numbers for other businesses in exchange for an advanced payment. One needs to exercise caution about such offers as they may be fraudulent.

5. What is the VAT One Stop Shop (OSS)?

The One Stop Shop (OSS) scheme was introduced in 2021. This new scheme is designed to make VAT returns easier. Suppose you sell in several European countries; then you are liable for VAT in each country and must file VAT returns there. You could file the declaration one by one with the tax authorities of these countries, but the OSS now makes it possible to do it all at once.

How OSS works

You provide details of all your supplies in the countries where you do business, and then these details are taken over by the country’s tax authorities where your business is registered. After this, Inland Revenue will ensure your sales are forwarded to the correct country. Instead of considering the countries’ different tax return deadlines, you file the OSS return four times yearly (even if you had no deliveries in a term).

The OSS system has different schemes based on your business location and transaction type. EU member states use the Union scheme, while non-EU countries (such as the United Kingdom) must use the non-Union scheme. Then you also have a third arrangement: the Import One Stop Shop (IOSS). This scheme applies when you bring goods from outside the EU into the EU and sell them. For example, when you sell a product from China to Germany.

For whom is the OSS intended?

The OSS scheme makes VAT returns easy when your sales exceed the European threshold of 10,000 euros. But an OSS registration is not mandatory! So, do you prefer to declare taxes locally? Then, you can still do so. This means you have to have a VAT registration per country and file VAT returns there, whereas, with the OSS, you only have one VAT number and file only one return. It is an illogical choice not to go for the OSS scheme. What is important to know is that you cannot choose both. You must either opt for the OSS regulation or local declarations.

Stock & VAT

If you stock your products in another country, you still need a VAT number. Keep an eye on this, especially if you sell through Amazon. When you use Amazon FBA, Amazon can distribute your stock across European countries. You are responsible for staying VAT-compliant. For example, Amazon does not arrange VAT numbers for you.

Example: Jan sells through Amazon.nl in the Netherlands, France, Italy, Spain and Germany. His company is based in the Netherlands. His turnover is 30,000 euros, exceeding the threshold amount of 10,000 euros. He can file his VAT return in two ways:

1. Local declaration: if Jan chooses this, he must apply for a VAT number for the Netherlands, France, Italy, Spain and Germany. In addition, he must file a separate VAT return for each of these countries with the relevant tax authorities.
2. Declaration via the OSS: if Jan chooses to declare his VAT via the OSS scheme, he only needs a Dutch VAT registration. Once a quarter, he provides the details of his deliveries to the tax authorities, who sort them for him and send them to the right countries.

Local returns can take a lot of time and effort. Applying for a VAT number for each country takes time, and communication takes place in the country’s language, so the necessary language knowledge is also required. That’s why the One Stop Shop can be an attractive choice for Jan: he only has to apply for one VAT number and not have to deal with different languages and return deadlines.

So, what has changed?

Before the OSS was introduced, each country could set its threshold. You must have VAT registration in that country if you exceed this threshold. Now, a general European threshold of 10,000 euros has been introduced. Do you exceed this threshold? Then you qualify for the OSS!

VAT rate

The country where you sell your goods determines the VAT rate, not where your business is located. The destination principle of the OSS scheme means that if you exceed the threshold, you must declare your sales in the OSS return. If you go above the threshold, you are required to declare your sales in the OSS return. Do you stay below the threshold? Then, the domestic VAT rules will continue to apply.

The most obvious change is the declaration itself. Entrepreneurs can now opt into the OSS scheme, making filing VAT returns much easier. Again, a One Stop Shop registration is not mandatory, but it does make it easier!

As mentioned above, the destination principle always applies when you use the OSS scheme. This means that you can charge the VAT rate of the destination country on your supply. So, it ensures that it no longer matters which country your business is based in! For example, large companies can no longer take an extra hit from being based in a country with a low VAT rate. Rates are now the same for everyone, creating a more competitive playing field.

What are the benefits of One Stop Shop?

First of all, a One-Stop Shop brings less administrative burden. After all, you no longer have to register for VAT in all the individual countries but only in the country where your company is located. So that already saves a lot of administration. Invoicing also only has to consider the country where you are located. This also saves a lot in administrative burden because European regulations can be diverse.

Second, the One Stop Shop arrangement often involves fewer costs. Instead of filing multiple returns, you must only do so once per quarter. So here are the key points in a nutshell:

• What: The OSS is a tax registration that regulates your VAT obligations for all EU countries
• Who: do you exceed the threshold of 10,000 euros? Then, you can make use of the OSS
• Why: The OSS ensures more competition but fewer costs and administration
• Where: you arrange your OSS registration with the country’s tax authority where your business is located
• Important: If you sell through Amazon, you still need a local VAT registration in countries where you store stock and an OSS registration

If you want to do only some of that yourself, specialised accounting firms will do this for you.

6. The legal requirements applicable to VAT invoices of dropshipping businesses

This section deals specifically with the EU legal requirements applicable to VAT invoices. Under EU law, sellers must issue invoices in most (i) business-to-business and (ii) certain business-to-consumer transactions. Certain exceptions apply to financial transactions and other transactions.

Before examining the specific requirements each VAT invoice issued by a dropshipping business needs to meet, we must mention that electronic invoices are equivalent to paper invoices. Also, it is important to know that there are two categories of invoice rules. The first category covers EU rules. The second category relates to national rules. Each EU country is free to adopt its own national rules to the extent that those rules do not contradict the EU rules. Thus, if you issue invoices under the laws of a given EU country, you need to be aware of both categories of rules.

Each VAT invoice needs to include:

1. The date of the invoice.
2. A unique sequential number identifies the invoice.
3. The VAT identification of the customer (if any).
4. The name and the address of the supplier.
5. The name and the address of the customer.
6. A description of the type and quantities of goods or services supplied.
7. Date of payment or transaction (if different than the invoice date).
8. The VAT rate is applied to the transaction.
9. The amount of VAT applicable to the transaction.
10. Breakdown of VAT amount payable by VAT rate or exemption.
11. The unit price of the purchased services or goods (exclusive tax, rebates, and discounts).

In addition to the information mentioned above, businesses are free to include any other information in their invoices. Such information may include (i) their brand, (ii) letterhead, and (iii) a message thanking their customers for choosing to buy their products.

FINALLY, every case is different. Sometimes there are legal schemes to avoid VAT or to optimize your taxes! Like always contact us at : info@dehoon-dhp.com.