EU VAT on imports and exports: how it works for goods and services crossing borders

By Diego Carmona — foreign trade and international transport consultant and trainer since 1991

EU VAT on imports and exports comes down to four rules: exports of goods outside the EU are VAT-free, sales of goods to a business in another EU country are VAT-free if three conditions are met, imports pay VAT at customs, and business-to-business services are, as a general rule, taxed where the customer is. The rules are not the hard part. Proving you followed them, when the tax inspector asks four years later, is.

This is how the EU common VAT system (Directive 2006/112/EC) applies to what a small or mid-sized business actually does when it buys and sells across borders: what you invoice with VAT, what you invoice without it, who pays, where, and which documents protect you. The examples come from Spain, where I work, but the framework is the same in every Member State.

How VAT works: the consumer pays, you collect

VAT is a general tax on consumption. The person who really bears it is the private buyer at the end of the chain. Tax authorities cannot knock on every door to ask how much you consumed this month, so they collect it from the businesses that sell. You are the collector. Unpaid, and liable.

To stop the tax becoming a cost for businesses, each one deducts the input VAT paid on its purchases from the output VAT charged on its sales. Each link in the chain pays only the VAT on the value it adds. This is the system of fractional payments: the tax authority collects the total in instalments, at every stage, and the fraud risk is spread across the chain.

An example at Spain's 21% standard rate (my own calculation): a manufacturer sells to a distributor for €1,000 plus €210 VAT. The distributor sells to a consumer for €2,000 plus €420 VAT. The distributor pays €420 minus the €210 it was charged, so €210. The tax authority receives €420 in two payments. The consumer pays all €420 and cannot deduct any of it.

That logic explains everything that follows. Whenever a cross-border transaction is invoiced without VAT, the system makes sure the tax is collected somewhere else: at customs, in the buyer's country or by the customer self-assessing it. VAT does not disappear. It changes hands.

One detail many people miss: legal form is irrelevant. A taxable person is anyone who independently carries out an economic activity, whether a company, a sole trader, a partnership or a foundation. A start-up is already a taxable person from its first investments, before it has sold anything, which is why it can deduct the VAT on those purchases.

The four transactions that trigger VAT

The Directive taxes only four events. If your transaction fits none of them, there is no VAT. If it fits one, the next questions are where it is taxed and whether it is exempt.

Own summary of Articles 2, 14, 15, 20, 24 and 30 of Directive 2006/112/EC.

Look at the last row. Importation is the only taxable event that does not care who you are. That is why import VAT is settled at customs rather than in your ordinary return, unless you defer it, as explained below.

Another point that causes trouble: a supply is only taxable if there is consideration, meaning a payment directly linked to what is supplied. No direct link between what is given and what is paid, no taxable supply.

With or without VAT? A cheat sheet by transaction

Own summary of Directive 2006/112/EC (Articles 32, 33, 44, 45, 60, 138, 146 and 196). Each rule has exceptions, explained below.

Where VAT is due: the place of supply rules

Place of supply rules decide which country taxes the transaction. There is one set for goods and another for services, and they look nothing alike.

Goods: where the transport begins

If the goods are not transported, the supply is taxed where they are when supplied. If they are transported as part of the sale, the supply is taxed where the transport begins. A sale from a warehouse in Zaragoza to a customer in Lyon is therefore located in Spain. Whether that supply is then exempt is a separate question, covered below.

A practical consequence few people see: if you hold stock in a warehouse in another EU country and sell from there, the sale takes place in that country. You will have VAT obligations there, even though your company is based at home.

Distance sales to consumers

Since 1 July 2021, when you sell goods to consumers in another EU country and ship them yourself (or someone ships them on your behalf), the sale is taxed where the transport ends. You charge the buyer's country VAT, not your own. The exception: if your intra-EU distance sales plus certain electronic services stay at or below €10,000 a year, you keep charging your own country's VAT.

To avoid registering in 27 countries there is the One Stop Shop (OSS): you register at home, declare all those sales there and pay each destination's VAT through a single portal. If you opt in, it covers all your EU distance sales; you cannot pick and choose.

If the goods come from outside the EU and you sell them to a European consumer, the sale is taxed in the country where the goods reach the customer. For consignments with an intrinsic value of up to €150 you can use the IOSS (Import One Stop Shop): you declare the VAT on the sale through it and the import is exempt, so the customer pays nothing on delivery.

Business-to-business services: where the customer is

The general rule for services supplied to another business is that they are taxed where the customer is established (or the fixed establishment that receives them). If a Spanish consultancy advises a German company, the supply is located in Germany. The consultancy invoices without Spanish VAT and the German customer self-assesses VAT in its own return. This is the reverse charge: it changes who pays, not where the tax is due.

The rule also applies to suppliers outside the EU: a Japanese law firm advising a Spanish company supplies a service located in Spain, and the Spanish company accounts for the VAT. But keep these exceptions to hand:

Own summary of Articles 44 to 59a of Directive 2006/112/EC. Member States may also apply use-and-enjoyment rules (Article 59a).