European Union – New Rules Require Non-EU Companies Selling Via the Internet to Charge VAT

On 7 May 2002, the European Union (EU) Council of Ministers formally adopted the E-Commerce Directive regarding Value Added Tax (VAT) on “online services”. The directive is to be implemented effective from 1 July 2003 in all 15 EU Member States—Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.


The directive changes the VAT place of supply rules for goods and services sold electronically. Irrespective of where the supplier of an online service is established, the directive states that the service is subject to VAT if it is “consumed” in the European Union. Conversely, VAT is not charged if the service is “consumed” outside the European Union.

As a result of these changes, EU VAT obligations fall on any business that is not resident in the European Union if it sells electronic services to private citizens in the European Union (and to certain non-business organizations). Affected businesses must register for VAT in at least one EU Member State and charge VAT to private customers, at the appropriate rate for each country. EU VAT rates currently range from 13% to 25%. Registration is not required for online services supplied to business customers who must self assess VAT.

A business that is established outside the European Union may register for VAT in each Member State where it has customers or it may register for VAT in a single Member State, under a new facility introduced by the directive. Under the single place of registration, a non-EU business must charge VAT at the appropriate rate in each Member State where it has customers, but it submits a single VAT return form in the Member State where it is registered. VAT paid on business expenses is not deducted from the VAT charged to customers. Instead, refunds of VAT are made through the EU 13th Directive procedure. However, reciprocity conditions do not apply—Member States are obliged to refund VAT in these circumstances, regardless of where the claimant is resident.

Online services sold by EU businesses to EU final consumers are taxed at the rate applicable in the country where the supplier is resident, not at the rate applicable in the customer’s country. Therefore certain non-EU businesses may decide to establish a branch or subsidiary in the European Union from which to supply their online services.

The new rules cover the following types of services:
  • Broadcasting, including subscription or pay-per-view radio, television and internet services;
  • Music downloads;
  • Film, video, images and photographs;
  • Software, including virus scanning, banner blockers, downloaded drivers, screensavers and search engines;
  • Text and other information, including online news, instant messages, stock prices, sports results and horoscopes;
  • Online publications, including books, manuals, newspapers, articles, newsletters, magazines and periodicals;
  • Online games, including interactive or downloaded software;
  • Distance teaching, online training and coaching;
  • Educational material, including encyclopedia, atlas and aerial maps; and Auction services.