EU: Charging and Deducting VAT in the European Union

May 26, 2021

If you’re operating an EU business, you need to comply with EU tax rules, and charge and deduct VAT accordingly. In this article, we’ll give you a brief overview on charging and deducting VAT in the EU.

When you’re charging VAT on the sale of products and services, ‘taxable supplies’ is a term that you might often see in use. These are simply the taxable goods and services. 

If you’re operating a small or a micro company and your annual turnover is lower than a certain limit, you’re usually exempt from registering for VAT. In each EU country, this threshold is different, and is usually between 10,000 and 50,000 €. 

Charging VAT on Your Sales

If you sell goods and services within the EU, in most instances you have to do the following: 

  • Register for VAT at your local tax office in the country where you’re established
  • Apply VAT to your sales transactions
  • Declare it to tax authorities and pay the VAT due. 

Keep in mind, however, that even if there’s no financial transaction that takes place, you might still need to charge VAT on their market value. This applies when: 

  • You’re giving away products or services for free.
  • You exchange goods and services for other goods and services. 
  • You’re getting goods or services for your own use. 

If you have doubts about whether you need to charge VAT on a specific transaction, your best course of action would be to contact your local tax office to get further information on that. 

Deducting VAT on Your Purchases

You can deduct the VAT you’re paying for business supplies you’re purchasing for your company from the VAT you’re charging to your customers. You need to report all transactions to your tax authorities and pay the difference between the VAT you’re charging and the VAT you’re deducting. 

You need to file quarterly VAT returns for the VAT you’re charging and that you’re claiming. 

If the VAT you’ve paid is higher than the VAT you’ve charged to your clients, your tax office will either pay you back or credit you the difference (for your next VAT return).

In each EU country, this procedure is similar, although there are slight variations to it. 

Invoices and VAT 

If you’re a VAT-registered business, you need to issue VAT invoices whenever you’re selling supplies to other businesses. These can be either printed or electronic invoices, and you need to apply the correct VAT rate to the transaction in question. Your invoice must contain your VAT ID number, and the amount and percentage of VAT you’re charging. 

It’s important to note that there are a few exceptions to this rule. 

If you’re selling services to a company located in a different EU country, you don’t need to charge VAT. The transaction is not VAT exempt, though—it’s the other party who will need to declare it in their country. 

If you’re selling goods to a buyer who is located outside of the EU, you also don’t need to charge VAT; instead, import rules and taxes will apply (for the buyer). 

An Automated Solution For Electronic Invoices

Fonoa Invoicing automatically generates locally compliant tax invoices for your transactions, regardless of the country. Create and send your invoices in your customers’ language, and customize them as needed.

Need help with invoicing? Reach out to us, and we will help you automate your invoicing processes.