EU VAT when buying products from other member states

Businesses in the EU buying products from companies in other EU member states are subject to different VAT requirements and the reverse charge mechanism.

This guide explores these requirements and the mechanism where buyers are concerned. Note that this guide only explains the VAT requirements regarding the purchase, not sales, of products.

Methodology

In order to research this article, we used the following sources:

a. Cross-border VAT

b. Where to tax?

c. Reverse charge on EU VAT

d. Purchases of goods and services in the EU

e. Reverse VAT Calculator – Calculation Formula

f. VAT rules and rates

g. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax

h. VAT returns

Do businesses in the EU need to pay VAT on products purchased from other EU member states?

According to the EU official website, if you are a business in the EU that buys products from other EU member states, you must declare and pay VAT on those products, at your country’s applicable rate.

For instance, when a French company buys a product from a German company, the place of supply is France, and the French company must pay French VAT.

When you declare your VAT, you can then deduct this amount.

What is reverse charge?

The EU established the reverse charge mechanism to put the responsibility of paying the VAT on the buyer of a product or service, instead of the supplier.

One of the reason for which the reverse charge mechanism was implemented was to reduce the obligations for buyers to register for VAT in all the EU countries where they purchase products.

When does reverse charge apply?

The reverse charge mechanism applies when buying products on a B2B basis within the European Union.

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Conditions

You must pay VAT under the reverse charge mechanism if:

• You are a business in the EU
• You buy products from businesses in other EU member states
• Your country require a VAT payment for the goods

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Case Study: Danish company buys cosmetics from a supplier in Italy

In this case study, Copenhagen Cosmetic A/S is a business in Denmark that buys cosmetics from Milan Organic Cosmetics SRL, a supplier in Italy.

Since the reverse charge requires buyers, not suppliers, to pay VAT, the Danish company must declare, and pay VAT on its VAT return in the field “VAT on goods purchased abroad” at Denmark’s VAT rate of 25% on the cosmetics it purchases.

Which VAT rate applies?

The applicable VAT rate depends on the country where the buyer is established.

Using the example above, Denmark’s VAT rate is 25%. Under the reverse charge mechanism, businesses in Denmark must pay 25% VAT when they buy products from other EU countries.

However, a buyer in another country would pay a different VAT rate (e.g. Italy’s VAT rate for Italian companies).

Country	VAT Standard Rate
Austria	20%
Belgium	21%
Bulgaria	20%
Cyprus	19%
Croatia	25%
Czechia	21%
Denmark	25%
Estonia	22%
Germany	19%
Greece	24%
Finland	24%
France	20%
Hungary	27%
Ireland	23%
Italy	22%
Latvia	21%
Lithuania	21%
Luxembourg	17%
Malta	18%
Netherlands	21%
Poland	23%
Portugal	23%
Spain	21%
Romania	19%
Sweden	25%
Slovenia	22%
Slovakia	20%

How do I calculate the payable VAT?

There is one method to calculate the payable VAT that uses the VAT rate.

Under the reverse charge mechanism, the buyer pays the VAT. In this example, the Danish cosmetics company mentioned previously pays the VAT on a product sold to another EU country. Denmark has a VAT rate of 25%.

VAT Amount = Net amount x VAT rate

VAT Amount = 100,000 EUR x 25% = 25,000 EUR

Therefore the Danish cosmetics company pays 25,000 EUR as VAT.

How do we declare the VAT?

According to Chapter 7 under Title XII of the EU’s VAT Directive, the company the purchase the products to is responsible for paying the VAT.

The company must:

a. Electronically report the VAT in a monthly declaration to the tax or customs authorities of the importing EU member state

b. Pay the VAT by the set deadline

c. Keep and maintain electronic transaction records and provide upon request to the authorities in the importing EU member state, so those authorities can verify the declared VAT.

Additionally, the person paying the VAT pays the difference between the VAT received from the customers and the amount that they must pay.

Can we offset the VAT paid on goods from other EU member states?

Yes, buyers can, under the reverse charge mechanism, offset the VAT paid on products bought from other EU member states.

In short, buyers must report their input tax (that is the VAT amount they must pay for the goods that they purchased) and output tax (that is the VAT they charge to their customers).

Then, they must pay the different, which is calculated as output tax minus input tax.