Collecting EU VAT and UK VAT in Europe
European Union Value-Added Tax regulations stipulate that if your business sells digital goods to European consumers, you must charge local VAT based on their locations. Additionally, businesses selling digital goods to UK consumers must adhere to similar regulations following Brexit, which introduced UK VAT requirements for non-UK businesses.
Are there EU VAT exemptions for selling SaaS?
There are no direct VAT exemptions for selling SaaS to EU consumers. However, certain small business exemptions may apply depending on your location.
For example, some EU countries offer VAT exemptions for small businesses with annual turnover below a certain threshold — such as €22,000 in Germany — which means they’re not required to charge VAT. These exemptions are based on national laws, so it’s important to check the specific rules of each country where you operate. One example of a small business exemption is Germany’s Kleinunternehmerregelung — a VAT rule designed for businesses with low turnover.
What you need to do as a Kleinunternehmen (small business):
- Submit the Jahres-Umsatzsteuererklärung (annual VAT return), which only requires you to declare your taxable turnover for the past two years.
Example: You became self-employed at the start of the year and made €15,000 in gross investments. Here’s how your invoice would differ with and without the Kleinunternehmerregelung:
| With the Kleinunternehmerregelung | Without the Kleinunternehmerregelung | |
|---|---|---|
| VAT (€15,000 x 19%) | €0 | €2,850 |
| Minus input tax refund | €0 | -€950 |
| VAT payment burden | €0 | €1,900 |
VAT (€15,000 x 19%)
|
Minus input tax refund
|
VAT payment burden
|
Are there EU VAT exemptions for selling downloadable software?
Similar to SaaS, small business exemptions may apply for selling downloadable software if your turnover is below a country-specific threshold in the EU. Additionally, some member states may provide reduced VAT rates or exemptions for certain software categories, such as educational or accessibility-related software. Be sure to check the VAT exemptions in each country where you do business, as they can vary significantly.
Who needs to charge EU VAT?
You do not need to charge VAT to businesses in another EU country. Given they provide a valid VAT number, they will handle the tax through a “reverse-charge mechanism.”
You must also charge UK VAT when selling to consumers in the United Kingdom, even if your business is based in the EU. The VAT rate applied will be the standard UK VAT rate, currently 20%.
However, you must charge VAT to consumers in other EU countries according to their local VAT rate. For instance, if your business is in Spain and a client from Finland buys your software, you need to charge the applicable Finnish VAT.
You are not required to charge EU VAT or UK VAT for sales to businesses or consumers outside the EU or the UK.
You do not need to charge VAT to businesses in another EU country. Given they provide a valid VAT number, they will handle the tax through a “reverse-charge mechanism.”
You must charge VAT to customers in the EU, with each sale taxed according to the VAT rates in the customer’s country.
Businesses based outside both the EU and the UK must register for and charge UK VAT on sales to UK consumers, and separately, they must charge EU VAT based on the consumer’s country within the EU. These are distinct tax obligations, and both apply depending on where your customers are located.
What is the VAT threshold for digital product sales in the EU?
There is a €10,000 threshold across the EU for cross-border sales of digital products. If your total sales within the EU exceed €10,000 annually, you are required to charge VAT in the customer’s country of residence. If your sales remain below this threshold, you can opt to charge VAT based on the VAT rate in your own country, but you may still choose to apply the destination-based VAT.
What is the VAT threshold for digital product sales in the UK?
As of 1 April 2024, the UK VAT registration threshold increased from £85,000 to £90,000. If a business’s taxable turnover exceeds £90,000 in a 12-month period, it must register for VAT. The deregistration threshold has also risen, from £83,000 to £88,000. These changes aim to ease the administrative burden on small businesses. For more details, you can read the full policy here.
VAT rates in the EU and UK
When selling software products to customers across the EU and UK, it’s important to apply the correct VAT rates based on the buyer’s country of residence. To your right is a list of standard VAT rates for each EU member state and the UK.
VAT rates in the EU typically range between 17% and 27%, with Hungary having the highest standard rate and Luxembourg the lowest. For cross-border sales of digital products such as software, businesses are required to charge VAT based on the customer’s location, not the seller’s.
Understanding these VAT rates ensures accurate tax collection and compliance across different EU member states and the UK.
- Austria: 20%
- Belgium: 21%
- Bulgaria: 20%
- Croatia: 25%
- Cyprus: 19%
- Czech Republic: 21%
- Denmark: 25%
- Estonia: 22%
- Finland: 25.5%
- France: 20%
- Germany: 19%
- Greece: 24%
- Hungary: 27% (the highest in the EU)
- Ireland: 23%
- Italy: 22%
- Latvia: 21%
- Lithuania: 21%
- Luxembourg: 17% (the lowest in the EU)
- Malta: 18%
- Netherlands: 21%
- Poland: 23%
- Portugal: 23%
- Romania: 19%
- Slovakia: 20%
- Slovenia: 22%
- Spain: 21%
- Sweden: 25%
- United Kingdom: 20%
How to report and pay EU VAT and UK VAT
Once you’ve managed and collected the correct VAT amounts from your software product sales to European consumers, you need to submit quarterly reports to the tax authorities.
If you are not a resident of a European country but are selling to consumers in Europe, you must register for the VAT One Stop Shop (OSS). This allows you to submit all your quarterly reports from a single location.
For UK VAT, non-UK businesses selling digital products to UK consumers need to register with the UK’s HMRC to report and remit VAT, even if they are already registered for the EU OSS system. The UK VAT reports must be filed separately from EU VAT reports.
Complexities of handling EU VAT and UK VAT when selling subscriptions
Selling software subscriptions in the EU introduces unique challenges related to VAT compliance, especially due to the recurring nature of payments. Here are the main complexities:
Recurring VAT calculations
In a subscription-based model, VAT must be applied not just to the initial purchase but to every recurring payment. This requires continuous tracking of VAT rates over time, which can be complicated if the rates change during the subscription period. Accurate calculations are essential to avoid non-compliance or undercharging VAT.
Handling VAT exemptions
Businesses selling to VAT-registered customers may need to manage VAT exemptions, especially when selling B2B. Under the ‘reverse charge mechanism’, VAT is not charged on sales to EU businesses with a valid VAT ID, but this exemption needs to be consistently applied throughout the subscription’s duration. If the customer’s VAT status changes, adjustments to the VAT treatment may be required.
Changes in VAT rates
During long-term subscriptions, VAT rates may change within a country. Businesses must ensure that the most current VAT rate is applied at the time of each payment, even if the subscription started at a different rate. Failure to update rates correctly could lead to penalties or customer dissatisfaction.
In short, selling subscriptions across the EU requires careful VAT management, frequent recalculations, and a reliable system to handle these recurring complexities. Without VAT automation tools like those offered by Freemius, staying compliant can quickly become a time-consuming and error-prone task.
VAT isn’t the only tax you need to manage — learn how sales tax works for software: Charging Sales Tax on Your Software: A Guide for Subscription-Based Businesses
Why were the EU VAT and UK VAT regulations introduced?
Historically, businesses charged VAT based on the rate in the seller’s country, allowing larger entities to save on taxes by operating in countries with lower VAT rates. This practice enabled them to pay less tax and pocket the difference.
The EU VAT regulations, which base the VAT rate on the consumer’s location, aim to level the playing field. Similarly, after Brexit, the UK introduced its own VAT regulations to ensure that digital goods sold to UK consumers are subject to local VAT, regardless of the seller’s location. Unfortunately, these new rules can be challenging for micro-businesses, as they require managing various VAT rates for customers across Europe, creating a considerable administrative burden.
Seamless EU VAT and UK VAT collection for your business
Freemius automatically handles VAT collection and reporting for your sales to EU and UK customers, allowing you to focus on developing your software products.
Geo detection
We detect the customer’s location using their IP address (geolocation) in the checkout screen.
EU and UK VAT calculator
Consumers located in any EU country will have VAT automatically added to their order amount, based on their country of origin.
Exemption for businesses
Consumers can provide their business VAT number, which we will use to assess eligibility for a potential VAT exemption. While there is no equivalent reverse-charge mechanism for UK VAT, businesses making sales to UK VAT-registered companies may be eligible for certain exemptions, depending on the nature of the transaction.
Recordings for reporting
All necessary information — location, VAT amount, business VAT number — is recorded by Freemius.
EU VAT and UK VAT reporting and payment
As the authorized reseller of your software products, Freemius acts as the merchant of record for all sales. We manage the collection of all applicable taxes from your customers, ensuring a smooth transaction process.
There is almost no way around having a merchant of record to collect and manage taxes worldwide as a company from within the EU. You would most likely need a full-time contractor to handle that, and paying the revenue share to Freemius is nowhere near the typical salaries here.
Simply Static
We handle reporting and remittance to the relevant European taxation authorities and the UK’s HMRC. This includes detailed records for both EU VAT and UK VAT obligations.
