Do I Have to Charge VAT to Overseas Customers?

Value Added Tax, or VAT, is a consumption tax applied to goods and services. For businesses with international customers, understanding whether to charge this tax is a frequent source of confusion. The obligation to charge VAT depends on what is being sold, the customer’s location, and whether the customer is a private individual or a business entity. This article provides a guide to these complexities, clarifying when and why VAT applies to overseas sales.

The Core Principle of Place of Supply

The foundation of all VAT decisions rests on a concept known as the “place of supply.” This principle determines the country where a sale is considered to have occurred for tax purposes, which in turn dictates which country’s VAT rules apply. It is not necessarily the physical location of the seller or buyer but a location determined by a specific set of tax regulations.

To apply the place of supply rules correctly, a business must first distinguish between its customers. Transactions are categorized as either “Business to Business” (B2B), a sale made to another business entity, or “Business to Consumer” (B2C), a sale made to a private individual. This distinction is important because the place of supply rules often differ significantly depending on whether the customer is a business or a consumer.

The nature of what is being sold is the other major component in this analysis. The place of supply rules for physical goods are different from those for services. For goods, the rules are generally based on the physical movement of the items from one location to another. For services, the rules are often based on the location of either the supplier or the customer, depending on the specific type of service and the nature of the transaction.

VAT Rules for Selling Goods Overseas

When selling physical goods, the VAT treatment is determined by where the goods are shipped from and where they are going. The rules are divided based on whether the goods are leaving the seller’s home VAT territory entirely or are simply moving from one country to another within the same VAT system, such as the European Union.

Selling Goods to Customers Outside Your VAT Territory

For businesses selling goods to customers located outside of their home VAT area, such as a European company selling to a customer in the United States, the sales are “zero-rated.” This means the transaction is subject to VAT, but the rate applied is 0%. While no tax is collected from the customer, the sale must still be reported on the business’s VAT return.

A benefit of zero-rating is that the business can still reclaim the input VAT it paid on the costs associated with making that sale. Input VAT is the tax paid on purchases of goods and services used by the business. This ability to reclaim input tax prevents the tax from becoming an embedded cost for the exporting business. To justify applying a zero rate, the business must maintain proof of export demonstrating that the goods physically left the VAT territory within a specific time frame, typically three months from the time of sale.

Selling Goods to Customers Inside Your VAT Territory

Selling goods to customers in a country that is part of the same VAT system involves a more complex set of rules. The correct procedure depends on whether the customer is a business or a private consumer.

##### B2B Sales

When a VAT-registered business sells goods to another VAT-registered business in a different country within the same VAT area, the sale is typically zero-rated. This operates under a mechanism that shifts the tax accounting responsibility from the seller to the buyer. The seller does not charge VAT but must take specific steps to validate the transaction.

The primary requirement is to obtain and verify the customer’s VAT registration number. Tax authorities provide online systems, such as the EU’s VAT Information Exchange System (VIES), for this purpose. The seller must confirm the validity of the number and keep a record of this verification. The value of these sales must be reported on the seller’s VAT return and, in some systems, on a separate declaration that lists all such sales.

##### B2C Sales

Sales of goods to private consumers in other countries within the same VAT area are subject to “distance selling” rules. The general rule is based on a single, territory-wide threshold, such as the €10,000 limit for sales across the EU. If a business’s total cross-border B2C sales of goods and certain services are below this amount, it can charge its home country’s VAT.

Once its total sales exceed this threshold, the business must charge the VAT rate of the country where the customer is located. To manage this, a business can use the One-Stop-Shop (OSS) scheme. Registering for OSS in its home country allows the business to report and pay the VAT for all its B2C sales across the territory through a single quarterly return.

VAT Rules for Supplying Services Overseas

The VAT rules for services supplied across borders follow a logic similar to that for goods, centered on the place of supply principle. However, the determining factors are based on the status and location of the customer rather than the physical movement of products. The rules are divided into a general framework for B2B and B2C supplies, with specific exceptions for certain types of services.

The General Rule for B2B Services

For most services supplied to a business customer (B2B), the place of supply is where the customer belongs. This means that if a business provides a service to a company based in another country, the service is considered to be supplied in the customer’s country. As a result, the supplier does not charge its home country’s VAT on the invoice.

This transaction is handled through a mechanism known as the “reverse charge.” Under this system, the responsibility for accounting for the VAT shifts from the supplier to the business customer. The customer calculates the VAT due on the service at their own country’s rate and reports it on their local VAT return. In most cases, if the service is for business purposes, the customer can simultaneously deduct the same amount, resulting in no net tax paid.

For the supplier, it is important to obtain proof that the customer is a business, such as their VAT registration number. The invoice issued by the supplier should not include VAT and should contain a notation indicating that the service is subject to the reverse charge.

The General Rule for B2C Services

When supplying services to a private consumer (B2C), the general rule is the opposite of the B2B rule. The place of supply for most B2C services is where the supplier belongs. This means a business providing a service to an individual consumer in another country would charge its own home country’s VAT, just as it would for a domestic customer. The sale is treated as a domestic supply for VAT purposes and is reported on the business’s regular VAT return.

Exceptions to the General Rule

An exception to the general B2C rule shifts the place of supply to the customer’s location for a broad category of services. This includes telecommunications, broadcasting, and electronically supplied (TBE) services—such as software downloads, streaming media, and online gaming. For these services, a business must charge VAT at the rate of the customer’s country, not their own.

The VAT registration threshold for these services is often zero, meaning even a single sale can trigger a VAT liability in the customer’s country. To manage this obligation without needing to register in multiple foreign countries, businesses can use the One-Stop-Shop (OSS) scheme. The OSS allows a business to register in one country and file a single quarterly return to declare and pay the VAT for all its B2C sales of these services across the entire VAT territory. The business must collect evidence of the customer’s location to apply the correct VAT rate.

Invoicing and Record-Keeping for Overseas Sales

Correctly determining the VAT treatment for an overseas sale is only the first part of the compliance process. Maintaining precise documentation and issuing accurate invoices are equally important to substantiate the tax position taken. Tax authorities require specific information on invoices and detailed evidence to be kept on file, especially when a sale is made without charging domestic VAT.

Information for Invoices

The information required on an invoice changes depending on the VAT treatment of the sale. For a zero-rated export of goods to a country outside the VAT territory, the invoice should clearly state the zero rate. For a B2B sale of goods or services to a customer within the same VAT territory, the invoice must include the customer’s valid VAT number. It should also feature a notation such as “Sale subject to reverse charge,” which informs the customer of their obligation to account for the VAT.

Required Evidence

A business must keep robust evidence to justify its VAT decisions, particularly for zero-rated sales. For exported goods, this proof must show the goods have physically left the country. Acceptable documents include:

• Official customs declarations
• Authenticated sea waybills or air waybills
• International consignment notes completed by the transport provider
• Commercial documents like the customer’s order and proof of payment

For services, especially B2B services where the reverse charge is applied, the evidence is proof of the customer’s business status and location. This includes keeping a record of the customer’s VAT number verification check. For digital services sold to consumers, where the place of supply is the customer’s location, the business must retain evidence to prove where the customer resides. This can include the customer’s billing address, the IP address used during the transaction, or bank details that confirm their location.