VAT (Value Added Tax) is a consumption tax applied to goods and services in the European Union. Understanding how VAT works is essential for any business selling to EU customers.
What is VAT?
VAT is a tax on consumption levied at each stage of production and distribution. Businesses collect VAT from customers and remit it to tax authorities, but can deduct VAT they paid on business purchases. The end consumer ultimately bears the tax. VAT rates vary by country and product category.
Standard vs Reduced Rates
Each EU country sets its own VAT rates within EU guidelines. The standard rate must be at least 15% (most countries use 19-25%). Reduced rates (typically 5-10%) apply to essentials like food, books, and medicine. Some countries have super-reduced rates near 0% for specific items. Zero-rated goods have 0% VAT but allow input tax recovery.
VAT for Digital Services
Digital services (software, streaming, e-books) sold to EU consumers are taxed where the customer is located, not where the seller is based. This means sellers must charge the correct VAT rate for each customer's country. The OSS (One-Stop Shop) simplifies this by allowing a single EU registration.
B2B vs B2C Sales
B2B (business-to-business) sales within the EU often use the reverse charge mechanism—the buyer accounts for VAT instead of the seller charging it. This requires validating the buyer's VAT ID. B2C sales always require charging VAT at the customer's country rate.