Value-added tax (VAT) is a consumption tax that is applied to most goods and services sold in Europe, added to the products original price. For European counties who are member states of the European Union (EU), there is a requirement for VAT to be no less than 15%, with a current average of 21%.
Why should businesses be aware of VAT in Europe?
If you are a business that is expanding to Europe, it is important to be aware of the different VAT rates in each country.
There may be a difference in rates between suppliers and you will need to charge the correct VAT rate to your customers. You will also need to account for VAT when you import or export goods. Furthermore, a business should consider that there are also differences in the minimum invoice values for refunds to be applicable. VAT rates, like all applicable taxations, might impact a decision on where to do business, where to establish your business in Europe, and the type of entity you decide to establish.
The EU standard VAT rate is 21%, with member states setting their own levels, to a minimum level of 15%. Luxembourg currently has the lowest rate in the EU with 17%, and Hungary the highest with 27%. Countries outside of the EU are not constrained, Switzerland has the lowest VAT level of 7.7%, due to rise to 8% in January 2024.
Reduced VAT Rates and refunds
Reduced VAT rates are applicable in some sectors or to specific products. Some examples of goods and services that are subject to reduced VAT rates include food, books, newspapers, pharmaceuticals, and passenger transport. Commonly, these VAT rates would be set at a lower rate of 5% to 10%.
VAT refunds can be claimed if you carry out a transaction which is not taxable in that country, and this will depend on any agreements between countries such as Double Tax Agreements. If you are undertaking taxable activities in-country, then you must be registered for VAT. VAT deductions may be applicable, and a VAT refund could be requested. This would be calculated as the VAT charged deducted from the expenditure. Applications for refunds are submitted electronically via tax portals in each country. There are differences in each country as to the exemptions and categories in which VAT refunds may be applied, some include vehicles, transport, food, or accommodation.
Tax incentives exist in the form of VAT exemptions, allowing businesses to provide goods and services with no added VAT. The exemptions vary from country to country but can include, medical care, education, and financial services.
There are also several VAT exempt areas within Europe, such as the Canary Islands and Ceuta in Spain, Heligoland in Germany, or Mount Athos in Greece.
Some countries in Europe apply a ‘zero-rated’ VAT approach instead of, or alongside, exemptions, you would need to ensure that rates are correctly applied.
How does this impact your business?
If you are a business that is expanding to Europe, it is important to be aware of indirect taxes applicable to your business or that may need to be included in your invoices. Taxation rates differ from country to country across Europe and may have a significant impact on the cost of doing business. It is important to assess the VAT applicable to your business and your supply chain, as well as assessing any exemptions or lower rates that could be applied.
HSP Group can help you with all your VAT compliance needs in Europe. We have a team of experts who can help you understand the VAT rules in each country, and we can help you implement a VAT compliance solution that is right for your business.
To learn more, please visit our website or contact us today.