SaaS Is Not Just SaaS – Why the VAT Qualification Matters
Software-as-a-Service (SaaS), streaming services, online tools, platform access, or AI services are generally treated as electronically supplied services for VAT purposes. This classification has immediate consequences for determining the place of supply – and therefore the country in which VAT is due.
However, this is where practical challenges often begin. Many businesses assess that they provide digital services, but do not sufficiently examine to whom those services are supplied.
B2B or B2C – The Place of Supply as a Key Determinant
In B2B transactions, the general rule applies:
The place of supply is where the customer has established its business. In most cases, the reverse charge mechanism applies.
In B2C transactions involving electronically supplied services, the rule is different:
The place of supply is where the private customer is resident. This means VAT becomes due in the respective EU Member State of the customer.
For digital business models with automated onboarding and registration processes, this represents a major source of risk:
- Missing or incorrect validation of VAT ID numbers
- Incorrect classification as B2B despite private customers
- Incomplete customer data
- Insufficient proof of the customer’s location
The result can be VAT being declared in the wrong country, requiring corrections – potentially including interest and penalties.
OSS as a Solution – But Not for Everything
For cross-border B2C supplies within the EU, businesses may use the One-Stop Shop (OSS) scheme. Instead of registering in each Member State of consumption, VAT can be reported centrally via the OSS portal in the Member State of establishment.
However, several common misunderstandings arise in practice:
- OSS applies only to certain B2C transactions
- Domestic supplies in the Member State of establishment are not reported via OSS
- B2B transactions must not be included in OSS returns
- Incorrect allocation may lead to double reporting
Furthermore, OSS does not necessarily eliminate all foreign VAT registrations – for example, where businesses maintain stock or warehouses in other Member States.
Special Considerations in SaaS Models
VAT complexity increases in cases such as:
- Platform models (acting in one’s own name vs. intermediary services)
- Freemium models with later monetisation
- Bundled supplies (software combined with consulting services)
- Subscription models with an international customer base
In such cases, it must be carefully assessed whether a single electronically supplied service exists or whether multiple supplies must be evaluated separately for VAT purposes.
Typical Audit Risks
Recent tax audits increasingly reveal:
- Insufficient documentation of customer status
- Missing evidence of the residence of B2C customers
- Incorrect application of the reverse charge mechanism
- ERP systems applying incorrect VAT logic
For rapidly scaling SaaS companies, VAT risk tends to increase in proportion to international expansion.
Conclusion
Digital business models are far from being a VAT “self-runner.” Correctly determining the place of supply is the foundation of VAT compliance – particularly when applying the OSS scheme. Businesses should therefore regularly review their registration processes, system configurations, and contractual structures in order to avoid costly corrections and liability risks.
