Intra-Community VAT: what it is and how does it apply?
VAT on cross-border supplies within the European Union is a complex, yet harmonized, area. Most companies are able to apply the usual rules on domestic transactions, but questions arise when the customer or supplier are located in another EU country.
The EU has a special regime for sales between EU countries. Such sales are not considered exports and imports . Instead, there are dedicated rules that makes trading easier when buying and selling from the EU instead of from third countries.
This article will cover the main aspects and usual VAT problems for businesses having an activity in the European Union.
What is intra-Community VAT?
Intra-Community VAT is a set of rules that apply to cross-border activities within the European Union.
European Union Member States have each their own national VAT Laws. However, there is a special and common VAT Law to regulate the commercial transactions made between companies and professionals within the EU, establishing a general framework that facilitates these transactions. The EU VAT Directive, which harmonizes the rules for this tax for all the EU Member States.
Finally, to add some context and establish the basic concepts, the main types of intra-Community transactions are the following:
- Intra-Community supplies of goods or services, where a business sells products or provides services to other EU countries and all conditions are met.
- Intra-Community acquisitions of goods or services, where a business purchases products or receives services from a supplier in another EU county and all conditions are met.
The EU VAT Directive harmonizes the rules for this tax for all the EU Member States.
How to apply intra-Community VAT?
The EU VAT Directive is implemented on the national VAT legislation of each Member State country. This means that when assessing the VAT treatment of an intra-Community transaction, the same rules apply to all Member States countries.
The VAT treatment of an operation will depend on the following main aspects:
- the type of goods or services,
- the flow of goods,
- the type of transaction performed – sale or purchase,
- the conditions of the buyer and seller – basically, B2B or B2C transactions, where B2B refers to business to business transactions, and B2C to business to final customer transactions,
- Also, other aspects such as incoterms, transport, documentation that can be provided by the supplier and customer can also have an impact.
As a general rule, intra-Community transactions require that both business and company parties have a VAT number valid in VIES.
You can have a look at our article about EC Sales List in Europe.
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Intra-Community supplies of goods to companies or businesses B2B
The first question to approach is: where to tax the B2B supplies of goods?
The general rule is that intra-Community transactions with goods are taxable in the country of arrival of the goods. Therefore, the intra-Community supply of goods will normally be reported as an exempt transaction in the country of dispatch provided that:
- there is a real movement of goods between the Member States
- the client has a valid intra-Community VAT Number in country of arrival (check in VIES).
As a result, you will issue an invoice at 0% VAT when making an intra-Community supply in the country of dispatch.
Intra-Community acquisition of goods B2B
You will receive an invoice at 0% VAT following the intra-Community supply VAT exemption, however, as a buyer, you must apply the reverse charge mechanism on the intra-Community acquisition.
Intra-Community supplies of goods to final customers B2C
We refer typically to intra-Community distance sales of goods when the goods sold – normally via an online shop, are sent to a private individuals in a different EU country. For example, an online shop established in Spain sells its products to private individuals in France.
The VAT treatment rules for this type of sales are broadly explained in our e-commerce manual. In a summary:
- The general rule is that you must apply the correspondent VAT rate of the country of the private customer – unless you can benefit from the 10,000 EUR threshold.
- OSS scheme simplifies the VAT compliance for online sellers when selling to private individuals in the EU.
You may find interesting the VAT rate database published by the EU.
Intra-Community supplies of services to companies or businesses – B2B
This covers the supplies of services provided to companies established in other EU countries. The topic is extensive, and there are plenty of applicable exceptions.
To sum it up, the general rule for place of supply of B2B services in an intra-Community context is that these services are taxable where the customer is established, therefore, you will not charge VAT on these supplies due to the intra-Community VAT exemption.
Exceptions to the general rule include those for transport services, chartering, services related to immovable property, or selling access tickets to an event.
Intra-Community acquisitions of services B2B
This is the other part of the above transaction. Normally, you will not pay VAT as you will receive an invoice at 0% rate, however, as a buyer, you must apply the reverse charge mechanism on the intra-Community acquisition.
In any case, if the type of service falls under a category subject to an exception to the general rule, the VAT treatment will be different.
You will find more information about EU VAT invoices on services to European clients on our dedicated article.
Intra-Community supplies of services to private individuals – B2C
The general rule for place of supply of B2C services in an intra-Community context is that these services are taxable where the Supplier is established. Consequently, you will normally charge VAT at your country’s VAT rate.
Which countries are subject to these rules?
Since the EU VAT Directive is applicable to all EU Member states, the previous rules apply on transactions made within all the European Union countries. There are some exceptions here, as some territories like Canary Islands in Spain, Faroe Islands in Denmark and certain offshore territories for France and The Netherlands.
Following the Brexit, the UK is not subject anymore to the EU VAT Directive. However, you must take into account that Northern Ireland is treated as a territory of the EU for customs, VAT (for goods only) and excise purposes.