Navigating Value Added Tax (VAT) in Europe can be challenging for companies expanding internationally. Although each country in Europe has its own unique regulations, the fundamental concepts behind VAT are the same. Understanding VAT clearly can help businesses operating in Europe both avoid compliance issues and optimize their operations.
What is VAT?
Value Added Tax (VAT) is a consumption-based tax applied at each stage of production or distribution. Unlike sales tax, VAT is collected incrementally at each point along the supply chain—from raw materials to the final sale.
For instance, imagine a French bakery that buys flour for €100 and pays a VAT of €20. When they sell bread made from that flour for €200, they charge customers €40 VAT. The bakery then deducts the €20 VAT already paid on flour and sends the remaining €20 to the French tax authorities.
Key Components of VAT
Several key aspects influence how VAT operates across European countries:
VAT Rates Vary Widely
Standard VAT rates vary significantly—from Hungary’s high 27% to 20% in France [TM2] to Luxembourg’s low 17%. There are also reduced and super-reduced rates for essential goods, like groceries and pharmaceuticals, each depending on the country.
For detailed comparisons, read about the differences in VAT rates across Europe.
VAT Registration
Businesses exceeding a certain turnover threshold must register for VAT in each relevant country. For example, if an online bike shop based in Germany sells products to customers across the EU and surpasses the country-specific thresholds, it must register for VAT in multiple jurisdictions.
Businesses selling above a certain amount (turnover threshold) must register for VAT in each country where they operate. For instance, if an online bike shop based in Germany sells bikes to customers across the EU, it’ll need to monitor its sales across the EU to see if they exceed the limit set by each country. If the limit is surpassed, the shop will need to register and report VAT separately in each of those countries.
Beginning in January 2025, EU member states may introduce an optional €100,000 VAT threshold for cross-border sales. This is known as the SME Special Scheme (a simplified regime for smaller businesses), and it works alongside existing domestic registration thresholds (up to €85,000 per year). If a company’s total cross-border sales stay under €100,000 and it does not exceed another country’s domestic threshold, it can apply for an ‘EX’ VAT number from its home tax authority. With this number, the business must file a quarterly report of exempt EU sales to its domestic authority.
VAT Returns and Payments
Businesses registered for VAT must also submit VAT returns (usually monthly or quarterly) to the tax authorities. These returns are reports that companies file to show how much VAT they collected from customers and how much they paid to suppliers. The VAT balance is the difference between these two amounts and reflects either how much the business owes or how much it can reclaim from the government. To stay in compliance and avoid penalties, companies must maintain highly accurate record-keeping and file returns on time.
In July 2025, the European Council adopted new rules to simplify VAT collection on EU imports. From 1 July 2028, non-EU suppliers—not EU customers—will be responsible for collecting and paying VAT on sales into the EU. For business-to-consumer (B2C) sales, suppliers are encouraged to use the Import One-Stop Shop (IOSS), which allows them to register in a single EU member state rather than in multiple countries. Because these rules may evolve, it’s important to seek expert advice when preparing for compliance.
As Takudzwa Mumbure, UK Accounting Director at HSP notes, “Staying ahead of VAT deadlines is absolutely essential. I see firsthand how often businesses underestimate the complexity of complying with VAT regulations, especially when operating across multiple EU countries.”
Reverse Charge Mechanism for Cross-Border B2B Transactions
For transactions between businesses across EU countries, the reverse charge mechanism often applies. This shifts the responsibility for VAT accounting from the seller to the buyer, simplifying cross-border transactions.
Essentially, the reverse charge mechanism is a way of handling VAT for B2B transactions between different countries in the EU. Instead of the seller charging VAT and sending it to the tax authorities, it is the buyer who calculates and reports the VAT to their local tax authorities. This simplifies cross-border transactions because the seller doesn’t need to register or manage VAT in the buyer’s country.
Takudzwa Mumbure points out, “When a company clearly identifies where the reverse charge mechanism applies, they can reduce administrative complexity and avoid unnecessary VAT registrations across multiple countries. However, it is important to note that when the reverse charge applies, some actions can trigger the requirement to register for VAT in other EU countries. For example, let’s say that your company holds or stores inventory in another EU country to speed up local deliveries. If that’s the case, this can create a local VAT registration requirement, regardless of reverse charge.
Navigating the EU’s New VAT in the Digital Age (ViDA) Rules
VAT in the Digital Age (ViDA) is the EU’s long-term project to modernize VAT rules for the digital economy. Adopted by the EU’s Economics and Financial Affairs (ECOFIN) Council, the changes will roll out between 2025 and 2035. The goal is to reduce fraud and make compliance easier for businesses. ViDA focuses on three areas: e-invoicing and real-time digital reporting, the platform economy, and single VAT registration.
From 2025, EU member states can require e-invoicing without prior EU approval. By 2030, e-invoicing will become mandatory for cross-border B2B (business-to-business) and B2G (business-to-government) transactions, and by 2035 all transactions across the EU must use standardized e-invoicing and digital reporting.
The rules for the platform economy are expected to take effect by 2030. Platforms such as Airbnb or Uber will be treated as “deemed suppliers,” meaning they will be responsible for collecting and paying VAT on behalf of service providers. Member states may choose to adopt these rules as early as July 2028.
Single VAT registration will also expand. From 2027, energy supplies will be included, and from 2028 the system will cover goods with installation and assembly, transport on trains, planes, and ships, and other services.
Finally, ViDA introduces a broader reverse charge mechanism for B2B sales, which will further reduce the need for companies to register in multiple EU countries. Taken together, these reforms will significantly impact businesses operating in or with the EU.
Common VAT Challenges Businesses Face
Navigating Multiple VAT Rates
Because each country sets its own VAT rates, businesses must carefully track changes to avoid errors. While many companies use VAT compliance software for this, it is generally a good idea to also consult a VAT expert to navigate challenges that are not as cut and dry as simply understanding VAT rates. If your company operates in the EU (or has plans to do so), we recommend reaching out to tan HSP VAT expert for advice on how to mitigate compliance risks.
VAT Recovery
Companies operating across borders frequently encounter complications when reclaiming VAT paid on business expenses in different EU countries. Clear documentation and an organized claims process are crucial for smooth recovery. HSP can provide end-to-end VAT compliance support, to ensure registrations are completed correctly, documentation is issued and maintained in the correct format, and filings are completed in compliance with EU and local member state rules.
How Understanding VAT Optimizes Business Operations
Managing VAT effectively does more than ensure compliance; it also helps businesses run more efficiently. Clear VAT strategies improve cash flow by optimizing the timing of payments and recoveries (reducing unnecessary interest charges).
Thus, companies that successfully navigate the complexities of VAT in the EU can price products competitively and forecast finances more precisely, thus safeguarding profitability.
Optimizing VAT Management
Businesses can adopt strategies such as:
- Utilizing VAT compliance software to streamline reporting.
- Regularly training finance and accounting teams on updated regulations.
- Engaging experienced VAT advisors, especially during initial market entry. For small to medium sized companies that are beginning their global expansion journey, this step is critical.
Understand VAT, Choose the Right Tools, Work with Experts
Clearly understanding VAT helps companies thrive internationally, especially if they are expanding overseas for the first time. Companies that stay in VAT compliance avoid costly errors, streamline operations, and strengthen their financial management. By using effective VAT compliance software and partnering with experienced VAT experts, companies can simplify the process of VAT management and focus more on growth rather than paperwork.
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