In today’s digital world, SaaS companies are thriving by providing creative solutions to users globally with subscription-based models. But understanding the complicated VAT rules in the European Union (EU) can be tricky for these businesses.
When Rainex expanded its operations into Europe, our financial team faced the complex task of navigating these rules, especially VAT charging on digital products. As we delved into this legislative landscape, it became evident that understanding these rules was not only crucial for our own compliance but also essential for our clients who operate in the EU market.
In this article, we aim to shed light on the regulations governing VAT charging on digital products in the EU. We will describe the specifics of when and where EU VAT applies to digital products, offering valuable insights and clarity tailored for SaaS companies.
Understanding EU VAT basics
Before diving into the specifics, it’s essential to grasp the fundamentals of EU VAT.
VAT is a consumption tax applicable to nearly all goods and services purchased and sold for use or consumption within the European Union.
Digital products, including SaaS subscriptions, are subject to VAT in the EU, regardless of the location of the seller. You’re required to charge VAT at the time of sale, collect it from the customer, and subsequently report and remit it to the government.
If you neglect to charge your customer, unfortunately, you’ll be responsible for covering the VAT amount from your own funds.
Determining VAT rates
According to EU law, the standard VAT rate must be a minimum of 15%, while the reduced rate must be at least 5%. The applied rates differ across EU countries and certain product categories. Moreover, some EU countries have maintained reduced rates and even exemptions for specific products and services.
For accurate and up-to-date information on VAT rates for a specific product in a particular EU country, it’s best to consult the country’s VAT authority.
Therefore, it’s crucial to identify the correct VAT rate applicable to each digital and non-digital product, based on the location where they are sold.
What products and services belong to digital?
As per the European Commission, digital products are formally referred to as electronically supplied services (or ESS).
According to Article 7 of Implementing Regulation (EU) 282/2011 ‘electronically supplied services’ shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.
The types of services considered digital include:
- the supply of digitised products generally, including software and changes to or upgrades of software;
- services that help create or manage a business or personal presence on the internet, like creating websites or webpages;
- computer-generated services provided over the internet or electronic networks in response to recipient input etc.
To receive the complete list of digital products, simply send us a quick message in live chat saying “digital products,” and we’ll provide you with the information.
It’s important to note that the services listed below are NOT considered digital:
- radio and television broadcasting services;
- telecommunications services;
- goods, where the order and processing is done electronically
- CD-ROMs, floppy disks and similar tangible media;
- printed matter, such as books, newsletters, newspapers or journals;
- CDs and audio cassettes;
- video cassettes and DVDs;
- games on a CD-ROM;
- teaching services, where the course content is delivered by a teacher over the Internet or an electronic network (namely via a remote link);
- offline physical repair services of computer equipment;
- offline data warehousing services;
- advertising services, in particular as in newspapers, on posters and on television;
- telephone helpdesk services;
- teaching services purely involving correspondence courses, such as postal courses;
- conventional auctioneers’ services reliant on direct human intervention, irrespective of how bids are made;
- access to the Internet and World Wide Web;
- telephone services with a video component, otherwise known as videophone services;
- telephone services provided through the Internet.
Location of your customer
When a sale takes place, it’s crucial to verify the customer’s location, because from 1 January 2015 digital services are always taxed in the country where the customer belongs.
There are two basic rules for establishing the location of your customer:
- If the customer is a business (taxable person), it’s either the country where it’s registered or where it has a fixed establishment receiving the service.
- If the customer is a consumer (non-taxable person), it’s the country where they’re registered, have their permanent address, or usually reside.
In real-world scenarios, it’s often challenging to be certain about the precise location of a customer. Therefore, sellers are permitted to apply certain assumptions to simplify VAT application.
1. Evidence to determine the customer’s location
The illustrative list of evidence includes:
- the billing address of the customer;
- IP-address of the device used by the customer or any method of geolocation;
- bank details such as the location of the bank account used for payment or the billing address of the customer held by that bank;
- the Mobile Country Code (MCC) of the International Mobile Subscriber Identity (IMSI) stored on the Subscriber Identity Module (SIM) card used by the customer;
- the location of the customer’s fixed land line through which the service is supplied to him;
- other commercially relevant information.
2. Assumptions regarding supplies at the supplier’s physical location and on board means of transport apply to both business-to-business (B2B) and business-to-consumer (B2C) transactions. The assumption for supplies at a physical location allows a supplier to assume that the customer is present at the location where the service is provided, making it taxable there. This applies to places like telephone booths, Wi-Fi hotspots, and restaurants, among others.
If your business solely serves customers within your EU Member State, you will only need to report VAT in your EU Member State (provided your business is registered for VAT or is required to be).
If you sell to customers with a valid VAT registration number in another EU country (if the customer has a VAT registration number, the sale is considered to be a B2B sale), then these customers themselves account for VAT in their Member State and you do not charge VAT for digital goods, because B2B customers are responsible for declaring and paying VAT to their own tax authorities due to an EU program known as reverse charge.
If your services are provided through a marketplace, it is deemed that you are providing the service to a VAT taxable person (i.e., the operator of the marketplace), who subsequently supplies the service to the end customer, a non-taxable person. The marketplace operator will have VAT obligations in EU Member States where the final customers are situated.
If services are provided to a taxable person or a non-taxable legal entity considered a taxable person, as outlined in Article 44 of Directive 2006/112/EC, and if that taxable person is based solely in one country, or, if there is no business or fixed establishment, resides permanently in one country, then those services shall be subject to taxation in that country. For example, if a SaaS company located in France provides subscription services exclusively to businesses established in France, the VAT on those services would be governed by French VAT laws.
VAT MOSS scheme
If you provide digital services to non-VAT taxable customers in other EU Member States, and these customers receive your service directly from you (not through a marketplace), you are required to collect and report VAT for those other EU Member States. This means you must charge VAT to these customers at the rate applicable in the Member State where they are located. To simplify VAT compliance for SaaS companies who sell digital products to consumers across multiple EU member states, the EU introduced the VAT Mini One Stop Shop (MOSS) scheme. Under the VAT MOSS scheme, businesses can declare and pay VAT on their digital sales in a single EU member state, streamlining the compliance process.
If you’re currently VAT registered in your Member State, you can also register for VAT MOSS using the same VAT identification number used for your domestic returns.
If you’re not VAT registered in your Member State (e.g., due to not reaching the domestic registration threshold), you can solely register for VAT MOSS. Sales in your Member State will remain VAT exempt as long as your annual turnover remains below the domestic threshold.
Essential timelines
- You may be aware in advance that you’ll begin providing electronic services to another EU Member State. In such cases, you’ll need to notify your Member State’s tax authority of your intention to use the MOSS scheme. Registration becomes effective from the first day of the calendar quarter following the notification.
- However, it’s possible that you may have served a customer from another Member State before deciding to use the MOSS scheme. In this scenario, you must inform your Member State by the 10th day of the following month that such a supply has been made, and the registration will then take effect from the date of that supply.
- You are required to electronically submit a quarterly MOSS VAT return to your Member State within 20 days following the end of the reporting period (e.g., the return for the first quarter must be filed by April 20th).
- Within this VAT return, you must declare the total turnover excluding VAT, specify the applicable VAT rates, and disclose the total VAT amount charged to your clients per Member State where supplies were made.
- The total VAT amount owed must be paid to your tax authority by the deadline for submitting the VAT return (e.g., by April 20th for the first quarter).
- Your Member State shares the VAT return information with all relevant Member States where supplies were made and allocates VAT revenue accordingly.
Practical advice for SaaS companies
When expanding into the EU market, SaaS companies must carefully consider their VAT obligations and compliance requirements. This includes registering for VAT in relevant EU member states, collecting and storing evidence of customer location, and implementing robust invoicing and accounting practices to ensure VAT compliance.
Navigating EU VAT regulations can pose challenges for SaaS companies selling digital products on a subscription basis. And if you sell globally and to a large number of customers, this task will require the creation of an entire department of billing staff to handle all the specifics.
But you should never forget that today’s digital world provides you with the tools to tackle any complexity. And tax compliance is no exception!
Rainex has integrated tax settings that encompass tax rules for every country worldwide, catering to various types of SaaS products. This feature alleviates the burden of individually studying each jurisdiction’s laws, offering convenience and efficiency for businesses operating in the European Union.
Just one switch in the system ensures correct tax determination and calculation in invoices both within the European Union and worldwide.
And if you have special tax preferences, Custom Tax Rules are at your service. They are manually customized based on 4 key parameters: product and customer country, service type and customer type.
Make your tax life easier with Rainex!
If you’re interested in exploring this feature and assessing its benefits firsthand, just get in touch with our team. We’ll be happy to show you how it works!
