General features of VAT payment in the EU

Value added tax

The EEC officially adopted the VAT system in 1977, enshrining it in the Sixth Directive. This directive laid the groundwork for the unification of VAT laws and procedures among member states, allowing for the introduction of uniform rules for its application.

As a general rule, VAT is a consumption tax levied on most goods and services purchased and sold for use within the EU. General VAT rules are set at the EU level, but their application may vary from country to country.

The way it works is that registered VAT payers provide customers with invoices that indicate how much VAT has been charged. If the client is a VAT payer himself, he can deduct this tax from what he has paid and pay the difference to the tax authority. This avoids double taxation, as the tax is paid only on the value added at each stage of production and distribution of a good or service.

The main features are that VAT:

• It is imposed on the “added value” of the product at each stage, which is the difference between the cost of materials and the selling price. For example, you buy a development program, create a new product or service, add value, and sell the program to a customer for a higher price, which is subject to VAT.
• It is collected when registered taxpayers sell goods or services to other businesses and consumers. For example, if you sell a subscription to your SaaS service, you add VAT to the price.
• It is “neutral” because businesses can reimburse the VAT paid on the goods or services they use. For example, if your company buys software for internal use with VAT, you can recover it when you sell your services.

Types of bets

In the EU, there is a VAT Directive that sets out a common framework for VAT rates. Within this framework, each EU state determines the quantity, level and categories of supply to which each rate applies.

Among the main rates in the EU countries are:

• The standard rate is the rate that EU countries must apply to the supply of most goods and services. It cannot be lower than 15%, with no maximum limit. For example, the VAT rate currently varies from 17% in Luxembourg to 27% in Hungary, with different values in other countries.
• A reduced rate is a rate that EU countries can apply to certain goods and services, such as food or medicines. It cannot be less than 5%.
• A special rate is a rate that some EU countries may apply to certain goods and services, under transitional conditions, up to and including 0%.

Rules for VAT calculation and payment

The basic rules of VAT in the EU determine which transactions are taxable and which are not. VAT is charged on the sale of most goods and services within the EU, but does not apply to exports outside the union, as the tax is paid by the importing country and not declared by the exporter.

Certain goods and services are exempt from VAT, including medical, educational, banking, insurance, and long-term housing rentals, while others also benefit from reduced rates for basic food, medicines, and books. However, in order to qualify for the exemption, exports must be confirmed, for example, by an invoice or customs declaration. Without proper documentation, a company may lose the right to a refund of previously paid tax.

Given these peculiarities, it is important to register as a VAT payer by obtaining an identification number. It is a unique number that identifies a taxpayer or legal entity. Each EU country issues its own VAT number, and a business that supplies goods or services in several EU countries may need to register in each of them.

In particular, businesses are required to register as VAT payers:

• when the company’s annual turnover exceeds the established threshold. Each country has its own threshold, for example, the lowest threshold is EUR 6,700 in Denmark and the highest in Italy – EUR 85,000. For non-residents, the minimum threshold does not apply in most EU countries. In addition, most countries set a separate threshold for foreign sales;
• when selling goods or services subject to VAT;
• when buying goods from other EU countries;
• when receiving or providing services subject to VAT.

Once a company is registered as a VAT payer, it must keep records of its transactions at the place of registration and file tax returns within the established timeframe.

Separately, there is a special electronic service to confirm the validity of VAT numbers within the EU – VIES VAT number validation (VIES). VIES allows businesses to check whether their partners are registered VAT payers in the EU. This simplifies transnational business, helps to avoid mistakes and tax fraud, and guarantees the correct application of VAT in intra-European transactions. Registration with VIES is usually automatic upon receipt of a VAT number, although in some countries (e.g., Germany, Italy, Spain) additional registration is required.

Simplified taxation mechanisms

Simplified VAT taxation mechanisms allow businesses to ease the process of paying the tax by reducing the administrative burden of international transactions. This includes the use of the following special schemes:

• One Stop Shop (OSS) – allows businesses to register for VAT in one EU country and report their sales through one system, instead of registering in each country separately. For example, your company, registered in Estonia, sells goods in several EU countries, but pays all taxes in the country of registration. In this case, if the total sales of such goods to individuals in other EU countries do not exceed the threshold of EUR 10,000 per year, the company may apply the tax rate of the country of registration, rather than each individual country of the buyer.
• Import One Stop Shop (IOSS) – simplifies the payment of VAT for imported goods worth up to €150. It allows businesses to quickly collect and pay VAT when importing goods into the EU. For example, you can use IOSS to simplify the payment of VAT on imported goods if you have an online store selling goods from China to the EU.
• Reverse charge – shifts the responsibility for paying VAT from the supplier to the buyer to reduce the risk of tax fraud. The payment of tax also depends on who the goods or services are sold to. For example, if your company in Spain sells goods to another business in Italy, no VAT is charged because it is an inter-business transaction within the EU. But if you sell the goods to a final consumer in Italy, VAT is charged at the Italian rate.
• Call-off stock – system whereby a supplier stores goods in a warehouse in another EU country and gives the buyer the right to pick them up if necessary without additional VAT registration. For example, your company from Germany sends its goods to a warehouse in Poland, where a Polish customer picks them up when needed without having to register for VAT in Poland.
• Спеціальний режим для малих підприємств (SME scheme) – allows small businesses registered in another EU country to exempt their supplies from VAT, provided that they do not exceed the annual VAT threshold set by the EU or the country where the company is registered. For example, your company registered in Portugal uses this regime to exempt its sales of goods from VAT, as its annual turnover does not exceed the established limit.

Conclusion

The EU VAT system plays a key role in harmonizing tax rules and maintaining the single market. It reduces administrative barriers for businesses and is a stable source of revenue for member states.

At the same time, despite the overall harmonization, VAT in the EU poses challenges due to different rates, exemptions and national rules that complicate the work of small businesses and companies that are just entering the European market. To overcome such barriers, the European Commission is gradually implementing measures to unify reporting and reduce tax differences between countries.

In addition, starting in 2030, it is planned to gradually introduce a system of mandatory electronic invoicing in intra-European trade. This will reduce tax losses and automate reporting, reducing the burden on businesses.