The creator’s ultimate guide to EU VAT

Digital Products Strategy & Operations
11 min read
In this Article

Creators need a guide to EU VAT now more than ever.

Why? Because while the creator economy has been booming and e-commerce sales hit their highest peaks, new tax laws are on the rise, too.

These new policies aim to tax online sellers of digital products, and the European Union has been at the forefront of this trend ever since introducing the One-Stop Shop in 2015. (More on this later!)

At Quaderno, we set out to make life easier for digital creators by clarifying what your tax obligations might be and how to comply with them. In fact, we built a whole tax compliance software to take this off your plate, because EU VAT is a pretty tricky subject.

By the end of this article, you’ll understand how VAT works, if you’re liable for it in the EU, and how ConvertKit can actually help automate tax compliance out of your day-to-day operations.
Without further ado, let’s jump in.

What is EU VAT?

EU VAT is the European Union’s Value-added Tax system, a general consumption tax on goods and services. It potentially applies to every sale made in the EU.

“Consumption tax” means that the tax is paid by the consumer, not by the business who makes the sale. That’s why you, as a business owner, need to know when to charge your customers this tax!

As for how much to charge as a creator, this depends. There’s no universal rate for digital products. Instead, the rates vary from 17-27% across all the member states.

Who does EU VAT apply to?

EU VAT applies to all kinds of businesses – from startups to service providers, from freelancers to creative entrepreneurs – who surpass a certain amount of sales within a year, or what’s known as a tax registration threshold.

Of course, the tax applies to domestic businesses that are based within a specific EU member state. But it can also apply to foreign businesses who sell to local customers!

Plus, EU VAT has special conditions for e-commerce sales – and these affect the creator economy. The tax applies to any online sellers that operate within EU countries, even if those sellers are headquartered on another continent.

Why should creators care about VAT?

Creators should care about EU VAT because tax compliance is a critical part of growing an online business. In the early years of the internet, there was little oversight of tax compliance; it was just too new and moving too fast for governments to keep up.

But with more technology available to tax authorities today, governments are cracking down, including the EU. Back in 2017, the Organization for Economic Co-operation and Development (OECD) even urged the need to detect and prevent tax fraud, recommending technology that would lead to “better detection of crime, higher revenue recovery, and synergies that can make tax compliance easier for business and tax administrations.”

While independent creators likely aren’t the big fraudsters that the EU is trying to catch, you can still face penalties for failing to charge VAT on the right sales – and late fees if you file VAT returns too late.

When you’re sure your business is tax compliant, you can sell with confidence anywhere in the world and focus on the work you love.

What digital products does EU VAT apply to?

The definition of digital products is a bit slippery. Technology innovates quickly, and the definition is intentionally broad so that it can encompass any new types of digital products that come on the market.

The European Commission does have four criteria that will determine whether something is a digital good:

  • It is not a physical, tangible good.
  • It’s essentially based on IT. The offering could not exist without technology.
  • It’s provided via the Internet or an electronic network.
  • It’s fully automated or involves minimal human intervention.

Some common digital products on the market today include:

  • Downloadable and online games.
  • Online courses and memberships.
  • E-books, images, movies, and videos, whether buying a copy off Amazon or using a service like Netflix.
  • Downloadable and streaming music, whether buying an MP3 or using a service like SoundCloud or Spotify.
  • Cloud-computing software and Software-as-a-Service (SaaS).
  • Websites, site hosting services, and internet service providers.

Note: You might also see them referred to as “digital services,” “e-goods,” or “e-services.” All of these terms refer to the same category of products.

When do you need to register for EU VAT?

For non-European businesses, there’s a simple rule:

The European Union’s tax registration threshold for foreign businesses selling digital products is 0€. So, if you’re selling digital products in the EU, you’re required to register for VAT upon your very first sale.

For European businesses, it depends:

Your home country might have a registration threshold, depending on the type of products you sell. For example, in Germany, the threshold is 17,500€. So if your total sales volume in a 12-month period remains below 17,500€, then you don’t have to register for EU VAT.

European creators should check the specific policies in their home country to see if they’re liable for VAT!

How to register for EU VAT

If you are based in the European Union, you should register in your home country. If you are based outside of the EU, you can register for VAT in the member state of your choice. That gives you 27 countries to choose from!

Once you’ve chosen where you want to base your EU tax operations, you register for a VAT One-Stop Shop (OSS) with that local tax authority. You can do this online. Choose “Union scheme” if you’re local, or find the “non-Union scheme” option for non-EU businesses.

Once you’ve completed the online registration process, you’ll receive a VAT number by email or post. For even more detailed guidance, read on about how to get a VAT number.

When do you need to charge VAT?

For non-European businesses, simple rules apply:

  • In B2B sales, you should use the reverse-charge mechanism and never add VAT.
  • In B2C transactions, you should always charge the tax rate of the customer’s country.

For European businesses, the answer depends on whether you’re selling to someone in your home country (domestic sale) or in another member state (cross-border sale).

  • For domestic sales, you charge the local VAT rate on every transaction.
  • For cross-border sales, this depends further on whether the transaction is B2B or B2C.

In cross-border B2B sales, you don’t need to charge VAT; instead you use the reverse-charge mechanism. You just need to receive a valid VAT number from the buyer, which you can validate with the VIES service from the European Commission – or by using the ConvertKit-Quaderno integration which verifies such tax IDs for you!

In cross-border B2C sales, you charge VAT to all customers. But the rate of VAT you charge depends on how much you’re selling within the EU.

What is the reverse-charge mechanism?

The reverse-charge mechanism is a method wherein the buyer pays VAT to their own government directly, rather than to your business (who’s effectively a middleman). This saves you trouble, as you don’t have to file a separate tax return in each country where you make a sale!

How ConvertKit helps you comply with EU VAT

Once you’re registered for EU VAT, there are five main components of tax compliance. ConvertKit can help you automate each step, taking the tedious process off your hands, giving you more time and peace of mind.

The 5 steps of EU VAT compliance are:

  1. Verify who your customer is and where they are
  2. Collect and store customer location evidence
  3. Calculate the correct amount of tax at the point of sale
  4. Send and keep detailed invoices and records
  5. File VAT returns every quarter

#1: Verify who your customer is

You must determine whether the sale is B2B or B2C. This is important, because it determines whether or not you charge VAT at all!

So, you should always ask the customer for their VAT registration number. Every business has one. If the customer doesn’t have one, you can assume it’s a B2C sale and should be taxed.

Then you need to verify that the VAT is valid. The best practice is to double-check their number with the VIES validation tool from the European Commission.

ConvertKit collects and verifies VAT numbers for you automatically, in real time!

#2: Collect and store customer location evidence

You must confirm the customer’s location. This determines how much tax you charge. If you charge them too little, you’ll be on the hook later for that missing money.

To confirm their location, you must collect two pieces of evidence. This evidence could be:

  • The billing address
  • Location of the customer’s bank
  • Country which issued the credit card
  • The IP address location of the buyer’s device

ConvertKit will automatically collect and double check the customer’s location evidence, by analyzing the billing information and other transaction information.

Note: You must keep this location evidence on file for 10 years to prove you are tax compliant. The best option is to keep digital files, and with ConvertKit, these records will be safely stored!

#3: Calculate the correct amount of tax at the point of sale

Calculate VAT based on the correct tax rate – which could be your local rate or the rate where your customer is located. Then you add this amount onto the price of the product. Of course, if the buyer is VAT-registered, then apply the reverse-charge mechanism instead.

ConvertKit always applies the correct tax rate to the sale, based on your business data and the location of your customer.

#4: Send and keep detailed invoices and records

The VAT invoice (or receipt) is a crucial part of staying compliant, and also will help you stay organized when the time comes to file your tax returns. Even those B2B sales where you don’t charge any tax – they need special VAT invoices, too.

The invoice or receipt must include the following information:

  • Your business’ name and address
  • Your business’ VAT number (if you have one)
  • Invoice date
  • Invoice sequencing number
  • Buyer’s name and address
  • Buyer’s VAT number. If you’re using the reverse charge mechanism, include the text “EU VAT reverse charged”
  • Rate of VAT applied
  • Amount of VAT added
  • Final amount of transaction after VAT is added

Keep each invoice on record for five years. These records must be electronically available at the request of any official EU institution. So the easiest and most efficient way to store invoices would be as digital files.

ConvertKit will automatically send tax-compliant invoices to your customers after each sale, and store the records securely in your account.

#5: File VAT returns in minutes, thanks to instant tax reports

This last step is actually pretty straightforward, thanks to the One-Stop Shop. You can file returns online, with the OSS where you’re registered. The website will tell you what information to enter for each country where you made a sale, and the system will calculate how much VAT you have to pay. Then you simply pay the entire bill to the OSS.

If you're an EU business that is not registered with the OSS, then you need to file your VAT returns with your home country.

As for when to file your returns, you do it at the end of each quarter. The VAT return deadlines are as follows:

  • 20 April, for the first quarter ending 31 March
  • 20 July, for the second quarter ending 30 June
  • 20 October, for the third quarter ending 30 September
  • 20 January, for the fourth quarter ending 31 December

To make this process super fast, ConvertKit provides you with an instant VAT report that details your taxed sales data in the EU for each quarter. With these reports, filing returns is a matter of simple data entry! For step-by-step instructions, check out this EU VAT filing guide.

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Annie Musgrove

Annie Musgrove is a tax researcher at Quaderno, where she writes about global tax policies that affect online businesses. Her goal with Quaderno is to create content that helps creators and other digital entrepreneurs to scale their businesses with confidence and peace of mind.

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