VAT (Value Added Tax) is one of the main indirect taxes in European Union countries. It is paid by consumers when purchasing goods and services, but companies administer it.
European companies add VAT to the amounts on invoices issued to their clients. After receiving full payment from the client, the legal entity pays this tax to the national tax authority of its country.
A company can both collect VAT from payments and pay VAT when settling with its contractors. In this case, the amount paid to the tax authority is the difference between the VAT received from clients and the VAT paid to suppliers. This difference is called the tax liability. If input VAT exceeds output VAT, the company submits a refund claim instead of paying tax.
- A manufacturer buys raw materials for €100 plus €20 VAT, totaling €120
- They produce a product and sell it to a retail store for €200 plus €40 VAT, totaling €240
- The manufacturer pays VAT to the state: €40 (from the sale) − €20 (from the purchase) = €20
- The store sells the product to the end customer for €300 plus €60 VAT, totaling €360
- The store pays the state: €60 (collected from the end customer) − €40 (paid to the manufacturer) = €20
As a result, the state collected a total of €40 in VAT, which equals 20% of the final price excluding tax.
These are the basic rules of how VAT works in the European Union. However, to trade across the EU, companies must have an EU VAT number registered in the VIES system , the VAT information exchange system between EU member state tax authorities. It was created to monitor the correct application of VAT in cross-border trade between companies within the EU.
VAT rules in the EU are governed by Directive 2006/112/EC.The directive allows each country to set its own VAT rate, but it cannot be lower than 15% (the standard rate) and 5% (the reduced rate, for example, for food or medicines). The directive also establishes special rules for cross-border trade.
How does VAT work in B2B between EU countries?
The sale of goods or services between companies (B2B) in different EU countries and sales to consumers (B2C) are taxed under different rules.
In B2B transactions (B2B) between companies that have a valid EU VAT number, when a company from one EU country sells goods or services to a company in another EU country, the seller does not charge VAT. Instead, the buyer self-assesses and declares the VAT in their local VAT return. This is known as the reverse charge mechanism. In such transactions, VAT is not actually transferred to the budget at the moment of sale.
If the seller does not have a valid EU VAT number, they are not permitted to issue invoices within the EU. For such transactions, the tax authority may assess VAT and apply penalties. If the buyer does not have a VAT number, the seller must charge their domestic VAT, and the buyer will not be able to claim an input VAT credit in their country or recover the VAT paid.
A company from one EU country (for example, Poland) sells goods or services to a company in another EU country (for example, Germany). The seller:
- Checks the buyer’s VAT number in the VIES database
- If the number is valid, it issues an invoice without VAT (reverse charge)
- Reports the transaction in its VAT return and in the EU recapitulative statement (VIES return)
A company from one EU country (for example, Poland) sells goods or services to a company in another EU country (for example, Italy), but the buyer does not have a valid VAT number. In this case, the Polish company must charge Polish VAT (23%) on the invoice amount.
How does VAT work in B2C between EU countries?
For B2C sales in the EU (to end consumers without a VAT number), the VAT rate is determined by the buyer’s country, not the seller’s country. If a company sells goods or services to end consumers in different EU countries, it must pay VAT in the country where the buyer is located. For example, a company in Poland selling to customers in France, Germany, or Spain must charge VAT at the applicable rates in those countries. This applies to electronic services (SaaS, online courses, digital products) and goods (e-commerce).
If the sale physically takes place within the seller’s jurisdiction, VAT is applied in that same jurisdiction. VAT collected from B2C customers in other countries must be paid to the tax authority of the buyer’s country. Previously, companies had to register for VAT in every EU country where they made sales. Now, the simplified OSS (One Stop Shop) scheme allows businesses to register once in their home country and declare and pay VAT owed to other EU countries through a single system. The buyer’s country is determined using the information provided by the customer or through automatic verification based on payment or other relevant data.
Current VAT rates in Europe for 2025
Country/Region | Standard rate | Country/Region | Standard rate |
Albania | 20 | Ireland | 23 |
Austria | 20 | Iceland | 24 |
Bosnia & Herzegovina | 17 | Italy | 22 |
Belgium | 21 | Lithuania | 21 |
Bulgaria | 20 | Luxembourg | 17 |
Switzerland | 8,1 | Latvia | 21 |
Cyprus | 19 | Moldova | 20 |
Czech | 21 | Malta | 18 |
Germany | 19 | Netherlands | 21 |
Denmark | 25 | Norway | 25 |
Estonia | 24 | Poland | 23 |
Greece | 24 | Portugal | 23 |
Spain | 21 | Romania | 21 |
Finland | 25,5 | Serbia | 20 |
France | 20 | Sweden | 25 |
United Kingdom | 20 | Slovenia | 22 |
Croatia | 25 | Slovakia | 23 |
Hungary | 27 | Ukraine | 20 |
VAT in the EU for electronic services
Between 2017 and 2019, the EU Directive 2017/2455 established rules for applying VAT to electronic services. Because of this, marketplaces may be responsible for collecting VAT, so both sellers and platforms monitor these processes. For example, marketplaces implement mechanisms to determine the customer’s country to apply the correct VAT rate.
For EU sales up to €10,000 per year, sellers may apply the VAT rate of their own country. Once this threshold is exceeded, VAT must be charged based on the buyer’s country, and the seller must switch to OSS.
Electronic services in the EU include:
- Digital product sales (e-books, PDFs, music, movies)
- Software or mobile app downloads
- Subscription platforms (e.g., SaaS services)
- Cloud storage
- Access to websites with paid content
- Online games, virtual goods, etc.
Not considered electronic services:
- Legal or consultancy services provided via e-mail
- Remote education with significant teacher involvement (live lectures, Zoom courses)
- Physical delivery of goods ordered online
- Supply of CDs, DVDs, or USB drives with content
- Ticket sales, even if sold online
- Radio and TV broadcasting
Although VAT administration in e-commerce may appear complex, numerous automation tools are available. For example, Quaderno is a service for automating VAT calculation and invoicing, with integrations for Stripe and PayPal. For small businesses, major e-commerce platforms (Amazon, Etsy, Shopify) offer built-in solutions for VAT calculation and collection.
VAT charging outside the EU
Generally, EU VAT does not apply to sales made outside the European Union. If a European company invoices a business in a third country, the invoice is issued without VAT being applied. “Third countries” include non-EU states (such asUnited States, Canada) and European states that are not EU members (e.g., Switzerland and the United Kingdom).
These countries can operate their own VAT-type systems or similar taxes (VAT, GST, Sales tax). EU VAT does not apply to these sales; however, local tax rules may still be applicable. Example: a European seller providing B2C sales to consumers in Switzerland must register in the Swiss VAT system if annual turnover exceeds CHF 100,000.
Frequently asked questions about VAT in Europe
No. With valid EU VAT numbers for both the seller and buyer, the reverse charge applies: the seller invoices with 0% VAT, and the buyer self-account for VAT locally.
In the buyer’s country. To avoid separate registrations in each state, use OSS: file one VAT return through the single window in your home country.
Valid EU VAT number verified in VIES, correct VAT basis (reverse charge or place of supply), correct invoice VAT line wording, and proof of buyer location for B2C/OSS.
VAT in the EU follows clear logic, but details (B2B/B2C, reverse charge, OSS/VIES, local rates) determine whether you overspend or protect budget and finance team time. If you sell in multiple countries, set up invoicing logic, thresholds, registrations, and reporting upfront, rather than through trial and error.
Do you need a tailored setup for your markets? We break down your flows (goods/services, buyer countries, platforms, PSPs), determine where and when to register for VAT/OSS, how to apply reverse charge correctly, and what documents to collect from counterparties. WoBorders consultation: support@woborders.agency. Think big. Expand fast. Without borders.
