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VAT: special arrangements applicable to services supplied electronically

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VAT: special arrangements applicable to services supplied electronically

The objective of this Directive is to create a level playing field for European Union (EU) businesses with regard to the indirect taxation of electronic commerce. The Directive also aims to make compliance for non-EU businesses as easy and straightforward as possible. The changes modernise the existing VAT place-of-supply rules for services by including the electronic commerce sector.

ACT

Council Directive 2002/38/EC of 7 May 2002 amending and amending temporarily Directive 77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services [See amending acts].

SUMMARY

Until now, the uniform basis of assessment provided for by the common system of value-added tax (VAT) has not adequately addressed the supply of services delivered electronically because the supply of services in this way was simply not envisaged when the existing tax system was set up. As a result, the application of the prior VAT rules to these transactions produced perverse and discriminatory results. Previously, electronically delivered services originating within the EU were generally subject to VAT irrespective of the place of consumption, while those from outside the EU were not subject to VAT even when delivered within the EU.

The objective of this Directive is to introduce new harmonised rules and thus eliminate distortions in competition for radio and television broadcasting services and electronically supplied services within the EU. The absence of a clear and fair tax regime was a disincentive to investment and put EU business at a competitive disadvantage.

The principal changes in the uniform basis of assessment provided for by the common system of VAT concern the place of taxation for services supplied in electronic form over electronic networks.

Electronically supplied services include services such as cultural, artistic, sporting, scientific, educational, entertainment, information and similar services as well as software, video games and computer services generally. The result is that:

  • for specified electronically delivered services, when supplied by a non-EU operator to an EU customer, the place of taxation is within the EU and accordingly they are subject to VAT;
  • when these services are provided by an EU operator to a non-EU customer, the place of taxation is where the customer is located and they are not subject to EU VAT;
  • when an EU operator provides these services to a business in another Member State, the place of supply is the place where the business customer is established;
  • where the EU operator provides these services to a private individual in the EU or to a taxable person in the same Member State, the place of supply continues to be where the supplier is located;

Non-EU operators are required to register for VAT purposes only when their business involves sales to final consumers. If they supply to EU businesses (and this covers the vast bulk of such transactions), they face no obligations at all as the business customers account for the VAT themselves on a self-assessment basis under the "reverse charge mechanism".

The simplest and most attractive option for non-EU businesses is to make use of the Directive's simplified scheme for such businesses. This allows them to identify themselves for EU tax purposes in a single European Member State, taking advantage of streamlined compliance and on-line reporting procedures.

Non-EU businesses are able to register with a tax authority in a Member State of their choosing. They are required to charge VAT to non-business customers in the EU according to the standard tax rate in the Member State where the customer lives.

Every three months, they pay the tax they have collected to the administration where they have registered, together with a return in electronic form detailing total sales for each EU Member State. On the basis of this information, the Member State of registration re-allocates tax revenue to the country of the consumer.

This simplified scheme for non-EU businesses is to be applied for three years, with the option of moving towards a more technically advanced scheme.

References

Act

Entry into force - Date of expiry

Deadline for transposition in the Member States

Official Journal

Directive 2002/38/EC

15.5.2002

1.7.2003

OJ L 128, 15.5.2002

Amending act(s)

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2006/58/EC

28.6.2006

1.7.2006

28.6.2006

RELATED ACTS

Council Directive 2006/138/EC of 19 December 2006 amending Directive 2006/112/EC on the common system of value added tax as regards the period of application of the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services [Official Journal L 384 of 29.12.2006].

Report from the Commission to the Council on Council Directive 2002/38/EC of 7 May 2002 amending and amending temporarily Directive 77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services [COM(2006) 210 final - not published in the Official Journal].

This report looks at the services covered by the Directive and the practical questions relating to the administration of the tax as well as its longer term operational framework.

Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative cooperation in the field of value added tax and repealing Regulation (EEC) No 218/92 [Official Journal L 264, 15.10.2003].

This Regulation sets out to enhance cooperation between Member States' tax administrations to help combat VAT fraud by removing remaining obstacles to the exchange of information. It has three main objectives:

  • to establish clear and binding rules on the exchange of information (in particular by electronic means),
  • to provide for direct contacts between national departments for combating fraud, and
  • to increase the exchange of information.

Last updated: 20.02.2007

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