Persons liable to pay VAT in the EU/reverse charge

As a general principle[1] or main rule, the VAT directive (VD) provides that VAT is payable by any taxable person (generally a business) carrying out a taxable supply of goods or services, whether the person is established within that member state or not, unless another person is by legislation appointed in their place. This means that a when a business is appointed as the person liable to pay VAT, it must register for VAT purposes in the member state where the taxable event is regarded as taking place[2]. The business must also file a VAT return and possibly a recapitulative statement, and pay VAT[3].

In some situations, the recipient of a supply, instead of the supplier, is appointed as the person liable for the payment of VAT to the tax authorities. This is generally called the “reverse charge mechanism”.

If a reverse charge applies, the supplier issues an invoice without charging VAT, but refers to the application of this mechanism. On the other side, the recipient of the supply is required to impute the VAT on the supply and report the VAT in its VAT return (sometimes also referred to as “self-assessment”). If the recipient is entitled to a deduction of input VAT, they can deduct the self-assessed VAT as input VAT on the same VAT return according to its VAT profile, i.e. fully-recoverable, partially-recoverable, etc.

Where a permanent establishment is involved, the rules of 192a VD and art 53 of the implementing regulation[4] apply. This situation will be discussed separately in another article.

The VD distinguishes between mandatory (member states “shall”[5]) and optional (member states “may”[6]) reverse charge possibilities. In this article, we focus on the “may” regulation of article 194 VD that refers to taxable supplies of goods and/or services in a member state rendered by a non-established business to any person established in that member state. 

Example

A Belgian business holds goods in a Dutch warehouse and sells these goods to a business, or to a non-taxable legal entity, established in the Netherlands. This supply is taxable in the Netherlands and the buyer of the goods is liable to pay VAT as the Netherlands has implemented article 194 VD of the Dutch VAT legislation[7] for all supplies by non-established businesses.

However, some member states have limited the application of the reverse charge only to businesses, or only to the simple supply of goods but not for services. Thus it is not easy to determine whether a supply falls under the reverse charge. 

Three member states[8] have implemented a regulation that states that the reverse charge never applies on a supply between a non-established business and an established person. However, if the non-established business fails to register for VAT, the reverse charge applies but the supplier doesn’t have a right to deduct (reclaim) input VAT.

Warning, alarm bells, code red, Defcon 5

When doing cross-border business, it is essential to establish the place of taxation and to investigate whether that specific supply falls under any reverse charge. One must realise that every member state that has implemented article 194 VD has established different and unexpected conditions, e.g. French VAT is payable on a taxable transaction in France on a supply of goods between two non-established business, but this VAT is reversed when the recipient holds a French VAT registration.

[1] Article 193 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value-added tax

[2] Article 214 VD

[3] Article 206 VD

[4] Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for the VD

[5] E.g. article 196 VD i.e. cross border B2B services as referred to in article 44 VD

[6] E.g. articles 194 and 199 VD

[7] Article 12(3) Dutch VAT Act

[8] Greece, Lithuania and Slovenia

Toon Hasselman is an experienced (30 years) high-level VAT and Customs Specialist to both national and international companies. He provides simple and practical solutions, quick 'outside-the-box' alternatives if necessary, and promotes a no-nonsense approach with a conclusive solution at fair cost. Toon is also the Global Vice-Chairperson of the GGI Indirect Taxes Practice Group.