The new regulations: distance selling within the EU
Distance selling within the EU means the sale of goods transported or dispatched by the seller of the product from one EU Member State and delivered to a private customer located in another EU Member State. Distance selling within the EU also includes sales for which the seller does not carry out the transport or delivery himself but has it carried out by others (on behalf of the seller).
The buyer must be a private individual (final consumer – B2C) regarding distance selling within the EU. The regulation, therefore, does not apply to entrepreneurs (B2B) who purchase the goods for their business. It also does not apply to legal persons holding a VAT identification number, VAT ID no. (e.g., local authorities or associations).
Details: distance selling vs Intra-Community supplies
Please note: There is a substantial difference in the VAT regulations applying for distance sales vs intra-Community supplies.
Distance selling within the EU, where the buyer of the goods is a private person, or the item is purchased for private consumption (B2C/Business to Consumer), is not the same as supplying goods to an entrepreneur within the EU (B2B/Business to Business). The resulting VAT obligations differ significantly. Therefore, the correct classification of the transaction type (B2B or B2C) is essential for determining the proper VAT consequences.
The following principle applies:
If the customer has a valid VAT ID number for a company based in the EU, this would be regarded as an intra-Community supply of goods (tax-exempt!). You must check the validity of the VAT ID number before the transaction takes place. Please document this check following the VAT regulations that have been in force since January 1, 2020 (so-called Quick Fixes). Otherwise, the VAT exemption may be denied, e.g., in future tax audits! CheckVAT ID from eClear offers the right solution for the required VAT ID number check and its audit-proof documentation.
If the customer does not have a VAT ID number – as is the case for private consumers – the rules on distance sales within the EU apply, i.e., the deal is subject to VAT in the destination country.
For distance selling within the EU, VAT is due in the country of destination
When determining the place of supply of distance selling for VAT purposes, solely where the transport of goods ends is relevant. From the EU VAT perspective, it is neither relevant where the seller is domiciled nor where the supply of goods begins.
For VAT purposes, the place of supply of distance selling corresponds to the European Union Member State that has the right of taxation for the sale of goods. This is the EU Member State where the transport of the goods ends, i.e. The country of destination.
Example: Walanda, a Munich-based online fashion shop, sells clothes to private customers in the Netherlands. The transport of the products starts in Munich, and Walanda arranges the transportation of the goods with the support of a logistic company that delivers the products to the Netherlands.
The place of supply for VAT purposes is the Netherlands, the destination country. Therefore, clothes sales are subject to VAT in the Netherlands.
Exception: The EU-wide threshold of €10,000
An exception to this country-of-destination principle applies if sellers` revenues from distance selling within the EU are less than €10,000 (net, i.e. excluding VAT) in both the previous year and the current year. The threshold does not apply to a single EU country, but covers all cross-border EU consumer sales.
If the seller does not exceed the threshold, the VAT rules of the Member State in which the seller is domiciled apply. Hence, cross-border EU sales below the threshold would be subject to VAT in the country of origin, i.e. where the transport of goods starts.
The seller can opt-out of the application of the threshold exception. If they do so, distance selling to EU consumers is subject to VAT in the destination country. The opt-out declaration towards the tax authorities is binding for at least two calendar years.
Example: Walanda, the Munich-based online fashion shop, sells most of its products in Germany. It also delivers some products to private customers in Austria and Poland, and Walanda does not sell clothes to customers in any other EU Member States. The value of goods Walanda sold to consumers in Austria and Poland in 2020 was only €2,000 net in each country. Walanda expected deliveries to Austria and Poland to be similarly low in 2021.
Walanda’s total cross-border EU sales of €4,000 do not exceed the EU-wide threshold of €10,000 in 2020 or 2021, and the company does not opt-out of the distance selling threshold regulations. Thus, the sales are subject to German VAT. Walanda must calculate German VAT for the sales of goods to Poland and Austria and pay it to the Munich tax office.
Important: The new EU-wide threshold covers both deliveries and services provided by electronic means (e.g. e-books, film, and music downloads).
Important: Even though the new regulations come into force during the current year, the threshold is a figure that applies to the entire calendar year. If a seller exceeds the annual value of €10,000 net before the new regulations came into force in 2021 or if the seller already exceeded this value in 2020, the new eCommerce Package regulations will apply for every cross-border sale to consumers made after June 30, 2021.
Our recommendation: take your time. Act now!
Most sellers will likely exceed the low €10,000 EU-wide threshold as of July 1, 2021.
Therefore, it is essential to start analysing the VAT consequences for their business and to decide:
- …whether they want to take advantage of the One-Stop-Shop (OSS) option or register for VAT in the individual EU Member States instead
- …whether they want/need to cancel existing VAT registrations due to the distance selling regime that is in place until June 30, 2021 – keep in mind that the OSS can only be used uniformly for all EU Member States
- … which VAT rates apply to the sellers` product portfolio in all EU-27
We recommend that sellers start to analyse the new regulations and the impact on their cross-border business activities as soon as possible and take the right action to be ready by 1 July 2021.