Tax and Legal
David Merz | Founding Partner
Zurich, August 12, 2023
The rapid growth of e-commerce and cross-border online trade offers businesses greater opportunities to reach customers from around the world. However, as an online shop, it is essential to understand the customs and tax regulations which apply to cross-border online trade in the European Union (EU). In this article, we will explore the key customs and tax regulations for online shops in the EU, including VAT considerations and the important recent changes in regulations.
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The rise of e-commerce has transformed the consumer landscape, allowing businesses to connect with customers worldwide. The EU is particularly well-suited to cross-border trade due to its single market with a total population of over 450 million consumers. This lucrative opportunity has resulted in exponential growth in cross-border online trade within the EU, as well as to neighbouring nations. However, this massive rise necessitates a clear understanding of the customs and tax obligations applicable to online shops in the EU.
The customs and tax obligations which apply to online shops in the EU depend on various factors. First and foremost, there is a clear distinction to be made between cross-border shipments to other EU nations versus shipments outside the EU.
Other factors which influence the customs duties and tax liability are overall delivery thresholds for VAT obligation, value of individual consignments, whether the transaction is B2C or B2B, and of course the individual VAT rates in the respective nations where the trade is taking place. There are also special rules which apply to certain items, such as excise goods.
We will examine all these factors and the relevant regulations which apply. The remainder of this section will provide an overview of customs and tax regulations for shipments to other EU nations versus non-EU nations (so-called “third countries”).
Online shops in the EU can benefit from the fact that the EU is a free-trade zone. One of the key objectives of the EU is to establish a single market, where goods, services, capital, and labour can move freely among member states. This eliminates tariffs, customs duties, and other trade barriers when shipping to customers in other EU nations. However, it is still important to consider the VAT regulations which apply to cross-border trades within the EU. Typically, VAT is charged in the country where the goods are delivered to, not the country of origin. The VAT payable therefore depends on the destination country’s VAT rates.
There are other VAT considerations which have an impact on where VAT is payable and at what rate, such as delivery thresholds and the new EU one-stop-shop (OSS). We will consider these in more detail in a later section.
EU online stores who ship products to customers in countries outside of the EU, such as to Switzerland, need to consider customs duties, import taxes, and VAT. The laws can be quite complex, and depend on various factors such as the value of the consignment (whether it is considered a “small consignment”), the total turnover from deliveries in the foreign country as well as worldwide turnover, and the individual regulations and tax treatment in both nations involved in the trade.
To simplify the customs and tax process for small consignments, some countries have implemented specific thresholds, below which there are no customs duties and only sales tax if certain conditions are met.
Switzerland’s import sales tax regulations are of particular interest to EU online retailers who frequently deliver products to Swiss customers. Switzerland previously waived import sales tax on small consignments with a tax value of 5 Swiss francs (CHF) or less. This meant that a package of goods taxed at the standard VAT rate of 7.7% was only subject to import tax if its value was CHF 65 or more (or CHF 200 at a tax rate of 2.5%).
However, due to recent changes in Swiss tax law, which came into force on 1 January 2019, these exemptions are only granted to companies whose so-called “small consignments”, do not exceed a total delivery threshold of CHF 100,000 per year. Therefore, online retailers delivering goods to Switzerland who exceed the delivery threshold are required to register for Swiss VAT and charge VAT on their sales, which is payable to the Swiss tax authorities.
Retailers that deliver small consignments worth less than CHF 100,000 in a calendar year are not required to register for Swiss VAT. In this case, they will only be required to pay import sales tax on shipments above the previously defined limits (of CHF 65 and CHF 200 respectively). The import tax is passed on directly to the customer for these consignments if the supplier has not registered for VAT.
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Let us now explore in more detail the various VAT considerations for cross-border trade in the EU.
VAT rates vary significantly across EU nations, as each member state has the autonomy to set their own desired VAT rate. Standard VAT rates in the EU range from a low of 17% (Luxembourg) to a high of 27% (Hungary). There are reduced rates for special items such as necessities and certain services. It is interesting to note that even the lowest standard VAT rate of 17% in the EU is well in excess of Switzerland’s 7.7%.
These variations need to be carefully considered by online retailers, because typically VAT is paid in the destination country. For the sake of simplicity, many online stores keep the final price of their goods (inclusive of VAT) uniform irrespective of variations in VAT rates in the destination countries; however, this can lead to reduced profitability when selling to a country with a higher rate of VAT.
As stated, VAT is typically due in the country to which the goods are delivered, not where they originate. However, this is also dependant on certain delivery thresholds being met, whether the purchaser is a consumer or another business, and other updates in the mail-order regulation.
Prior to the updates in mail-order regulation, retailers were only required to register for, and pay VAT in a destination country if the country-specific delivery threshold was exceeded. These thresholds ranged from EUR 35,000 to EUR 100,000 in the EU. This effectively meant that if a shop delivered goods to customers in another EU nation, they would only be obligated to pay VAT there if they exceeded that specific country’s threshold, otherwise the sales tax would be paid in their own country from where the goods originated.
The old legal status meant that many online retailers could avoid paying VAT in the destination country. However, since 1st July 2021, the previous delivery thresholds have been replaced by the EU’s new “distance selling regulation”. Under these new regulations, online retailers in the EU are required to pay sales tax (VAT) in the destination country where the item is delivered to if they exceed a total delivery threshold of EUR 10,000 per calendar year for goods sold within the entire EU. If their total turnover from goods sold in the EU is below this threshold, they do not need to pay VAT in the destination country.
The new regulations are clearly far more onerous, and only small businesses with a very low sales turnover in the EU would avoid having to pay VAT in the destination countries where they deliver their goods to.
The new regulations have resulted in online retailers being required to pay VAT in potentially multiple EU nations if they exceed the EU-wide threshold of EUR 10,000 turnover. This, of course, creates additional complexities and administrative burdens, especially for businesses which ship their products all over Europe.
To simplify VAT compliance and create a smoother collection process, the EU also introduced the “one-stop shop” (OSS) system along with their VAT reforms. The OSS system allows retailers to register for VAT in a single EU member state and pay all their VAT obligations for EU sales to the central tax authority of that state, including foreign sales tax.
An extension of the OSS system came in the form of the newly introduced “import one-stop shop” (IOSS) which is of particular importance to e-commerce retailers from non-EU nations shipping to EU customers.
Previously, imported consignments below the threshold value of EUR 150 were exempt from having to declare and pay VAT. However, under the new regulations, import sales tax must be paid on all commercially imported goods, irrespective of their value.
As such, the special regulations of the IOSS applies to imports from non-EU countries with a material value under EUR 150, which enables online retailers to submit their IOSS-eligible EU sales to a central tax office in a single tax return. These retailers are exempt from having to register for and pay import tax to each particular EU nation that they ship to if the sales are eligible for IOSS.
The IOSS procedure was introduced to ease administrative difficulties for sellers dealing in small consignments. For larger consignments with a material value exceeding EUR 150, the IOSS system cannot be used and the seller is required to register for and pay VAT in the destination country, usually with the help of a fiscal representative in the EU nation in question.
When determining VAT obligations for EU online shops, it is important to distinguish between business-to-consumer (B2C) and business-to-business (B2B) transactions. The new regulations regarding VAT obligations and delivery thresholds described above only apply to B2C transactions.
Retailers who engage in B2B trades with businesses in other EU nations are generally liable to pay VAT in their own country, not the country of delivery. Furthermore, the seller may be exempt from collecting VAT on the sale altogether if they provide the necessary proof of it being a B2B transaction. Instead, the recipient (buyer) accounts for the VAT themselves under the reverse charge mechanism. This involves reporting the VAT on their own VAT return and simultaneously deducting it as input VAT.
Excise goods, such as alcohol, tobacco, and coffee, are subject to special rules including additional excise duties. Furthermore, the IOSS system cannot be used for the importation of these goods into the EU from third-country nations. The goods must be declared separately, and all duties and taxes must be paid in the country in which the goods are delivered.
The new VAT and import regulations introduced in Germany and the rest of the EU in recent years have resulted in significant changes, and directly impact Swiss online retailers.
Firstly, Swiss businesses that exceed the EUR 10,000 threshold for distance sales to the EU must register for and pay VAT in the EU on their exports. If all the deliveries involve small consignments under the value of EUR 150, they can take advantage of the IOSS system and only need to register and complete a single tax return in one EU member state for all their EU sales. They will need a fiscal representative in the EU state to help facilitate this.
However, if they deal in larger consignments with a material value exceeding the threshold of EUR 150, or if they sell excise goods, they are required to register for VAT in the specific nations in which they deliver goods and pay import tax there on these larger consignments. This obviously involves a greater administrative burden and therefore additional costs. As such, Swiss retailers delivering to EU nations should check well in advance if the IOSS procedure can be used for their deliveries and go through the necessary registration process to ease their administrative burden further down the line.
Navigating the tax landscape for online shops in the EU can be complex and time-consuming. That’s where Nexova AG comes in. With our specialised knowledge in cross-border trade, Nexova AG provides comprehensive services to assist your business in complying with customs regulations, managing VAT obligations, and optimising your cross-border operations.
Our expertise in VAT compliance ensures that we can help you navigate the complexities of VAT regulations, including determining the correct VAT rates, managing VAT registrations, and facilitating VAT reporting and payments.
We are always up to date with the latest regulatory changes, ensuring that our clients remain well-informed and compliant with the evolving customs and tax requirements. By partnering with Nexova AG, you can focus on your core business while entrusting your cross-border trade tax administration to a knowledgeable and experienced partner like us.
Contact us today to find out more about how we can help your business succeed in its online retailing activities in Europe!
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