Overview of the VAT system in the EU: basic principles and rules

Value-added tax (VAT) is one of the most important components of the fiscal policy of many countries, including the countries of the European Union (EU). The VAT system in the EU consists of complex rules and principles that regulate the taxation of consumer goods and services in the domestic market. According to this system, tax is collected at each stage of production and circulation of goods, which is reflected in the price of the final product.

Let’s understand what types of VAT rules apply in the European Union, considering their essence and impact on enterprises and consumers in the European economic space. After all, understanding these aspects is important for the effective functioning of the EU internal market and ensuring the financial stability of the entrepreneurs of the member countries.

What acts regulate VAT in Europe?

The VAT system in the European Union (EU) is regulated by a number of legal acts at two main levels: at the level of the European Union and at the national level of the countries:

1. Directive 2006/112/EC of November 28, 2006 on VAT: This is the main EU legal document that regulates the VAT system throughout the European Union. It establishes general principles and rules for taxation of consumer goods and services within the EU. The directive establishes minimum VAT rates, principles of taxation of international trade, as well as rules regarding the place of VAT transactions.
2. National legislation: Each member state of the European Union has its own national legislation governing aspects of the VAT system within its territory. This includes the determination of final VAT rates, rules for accounting and payment of tax, exemptions and special cases of taxation. National legislation always takes into account the provisions of the Directive and integrates them in its own way. For example, the Directive stipulates that the minimum VAT rate in Europe is 15%, and each individual EU country already sets its own individual rate.

In addition to the main directives and national legislation, there are other auxiliary acts and regulations that can detail or supplement the VAT rules in various aspects: these are administrative regulations, decisions of the European Court of Taxation and regulations of ministries and tax services of member countries.

The general purpose of these acts is to create a unified and simplified system of taxation of consumer goods and services within the European Union, contributing to the development of the internal market and ensuring financial stability.

Basic rules of VAT taxation in Europe

According to the aforementioned Directive, the following transactions are subject to VAT in the EU:

1. Supply of goods and services for remuneration within the EU member state:

– Sale of goods by a taxable person within an EU member state.

– Provision of services within the EU member state, including electronic services on the Internet.

2. Purchase of goods and services within the EU:

– Purchase of goods from a taxable person or non-taxable legal entity, if the seller has the status of a taxable person.

– Purchase of new vehicles or excise goods.

3. Import of goods:

– Operations of importing goods into the customs territory of the European Union.

However, there are cases where the above operations are not subject to VAT:

• Purchase of goods that are the subject of a margin scheme (for used goods, works of art, etc.).
• Purchase of used vehicles provided the seller is a taxable dealer and is acting as such.
• Purchase of goods within the EU, which are the subject of special sales mechanisms from public auctions (for example, antiques, exhibits, etc.).
• In cases of exemption of a legal entity from taxation.

Please note that the export of goods and services outside the European Union is exempt from VAT.

The fiscal obligation to pay VAT rests with the final consumers, since they are the ones who actually pay this tax when buying goods or services. However, although this burden lies with consumers, they are not the ones responsible for the administration and recalculation of VAT to the budget.

This responsibility lies with sellers of goods or services. This means that sellers are obliged to register as VAT payers upon reaching a certain threshold value (each country sets its own threshold), collect this tax from their customers, report VAT to the tax office, and then transfer the tax to the state budget. This VAT administration process is an important part of the tax system that helps ensure the stability and efficiency of tax collection.

Determination of the country of payment of VAT

In order to determine whether VAT should be charged, as well as in which country this tax should be paid, it is very important to establish the place of transactions. For most transactions, this is where the buyer is located or registered for tax purposes.

This principle is known as the place of consumption principle. Under this principle, when goods or services pass from one entity to another, the location of transactions is determined based on the location of the buyer, not the seller.

For example, if a company from France buys goods in Germany for its activities, the place of the transaction will be Germany, since the buyer is a French company. This transaction will therefore be subject to German VAT rules.

This principle is also used to determine whether tax must be paid on imported goods. If goods are imported into a country, the place of payment of VAT is usually determined by the place of destination, i.e. the country where the goods will be used or consumed.

This rule avoids double taxation and provides clarity and transparency in the field of international operations, simplifying the determination of tax obligations for businesses and ensuring stability in the field of international trade.

VAT rates in Europe

As already mentioned, EU member states have the right to set their own VAT rates, but they cannot be lower than 15%. Currently, VAT rates in Europe vary from 16% to 27% and can be divided into three types:

1. Standard VAT rate: This is the most common rate that applies to most goods and services. It usually ranges from 16% to 27% depending on the country. The most common VAT rate in Europe is 20-21%.
2. Reduced rate: This rate applies to certain types of goods and services that are considered essential for life and daily consumption. For example, it can be food, books, medicines, newspapers, etc. The reduced rate is usually between 5% and 15%, and cannot be less than 5%.
3. Preferential rate: This rate applies to certain specific goods or services that may be related to culture, art, education, etc. These rates can be zero or very low 3-4%.

It is important to note that VAT rates may change from time to time depending on economic conditions and legislative changes in the country. Therefore, it is important for businesses to constantly monitor changes in VAT rates and adapt their accounting and pricing accordingly.

Registration as a VAT payer and important nuances for entrepreneurs

VAT registration and reporting are key aspects for any company trading goods in the European Union. Therefore, let’s talk about the important steps and requirements related to this process:

• Registering as a VAT payer: The first step for a company is to register with the relevant tax authority of the country where they intend to trade. This may require the submission of certain documentation, such as the company’s articles of association, identification number, etc. After successful registration, the company receives a unique VAT number.
• Record keeping: After receiving a VAT number, the company is obliged to keep records of all transactions related to the collection and payment of VAT. This includes keeping records of purchases, sales, receiving and issuing invoices, etc.
• Reporting: VAT payers must regularly submit reports on their activities to the tax service. This may include filing monthly, quarterly or annual tax returns, depending on the size and type of business of the company. These reports should show the amount of VAT that was collected from customers, as well as the amount of VAT that was paid on purchases.
• Compliance with document retention requirements: VAT payers must retain all relevant documentation related to VAT transactions for a specified period of time. This includes invoices, contracts, waybills and other important documents.
• Use of electronic systems for invoices: the EU is actively implementing the E-Invoicing system, currently only a few countries (Poland, Romania, Italy, Spain) have implemented such changes in their legislation, but it is worth considering that this is an inevitable stage of digitalization in the EU that should be followed ready for other countries as well.

Adhering to these registration and reporting requirements helps companies avoid problems with the tax authorities and ensures proper and efficient operations in the European Union.

If you have questions about the VAT system in the EU, or your company plans to trade within Europe, contact the lawyers of Azola Legal Services, who will provide you with all the necessary information about tax obligations and help you obtain the status of a VAT payer in Europe.