For non-European Union companies providing digital services (software, server facilities, online films, music, books, Ap’s for phones etc.) to European Union consumers, there are special rules for charging and reporting Value Added Tax.
Below is an explanation of the potential VAT liabilities, and some ideas for reducing and managing this burden.
Any services supplied digitally are considered as electronic services within the EU. These include:
Non-EU companies providing the above digitised services to local consumers must comply with EU VAT compliance regime. Until recently, this meant registering their company with the tax offices of each country where they were selling, and then making regular filings and payments of VAT.
However, this was all simplified in 2013. Non-EU companies may now register with just one of the 28 member states’ tax authorities, and submit all filings and payments to that tax office. This will include country locations of each customer (with the appropriate national VAT rate charged), which the tax office will then use to allocate and split the VAT payment between the other appropriate tax authorities.
Something similar is in the pipeline for EU companies for 2015.
Many larger non-EU companies have elected instead to form local companies in one of the EU countries, and contract with EU consumers through this company/branch. This gives special VAT advantages as (only until 2015), the branch would only use the VAT rate of the country where it is established. Based on this, many companies (e.g. Amazon) have elected to locate their European branches in Luxembourg with the EU’s lowest VAT rate, 15% (3% on digital books).
Increasingly, non-EU companies are turning to agency agreements with local distributors to avoid the burden of charging and complying with VAT. The is perfectly lawful, and shifts the burden of the tax compliance to the distributor.
Whilst not part of the EU, Norway and Switzerland operate similar VAT systems. Both countries now require non-resident, foreign companies to charge their local VAT rates. They companies must register for VAT with the local authorities, and report and make payments in a similar way to resident suppliers of electronic services.
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