What is VAT Reverse Charge?

Reverse charge is a mechanism that prevents double taxation between two companies established in different European Union countries.

When company A invoices company B located in another Member State, VAT is charged at 0%. The buyer (company B) must then apply reverse charge, meaning they declare and remit the VAT themselves to their tax authority.

This mechanism is mandatory when both companies hold a valid intra-Community VAT number.

How It Works in Practice

Let’s take a simple example:

• A French company invoices a Bulgarian company.
• The invoice is issued excluding tax (0%).
• The Bulgarian company declares and pays the VAT in its own country, according to its local rate.

This system also applies to service provision, particularly in consulting, IT, and B2B e-commerce.

Conversely, if the customer is an individual (B2C), VAT must be collected at the rate of the country of consumption. This is where the OSS one-stop shop comes in, which we detailed in the article on VAT in Europe and internationally.

Benefits for Businesses

Reverse charge offers several benefits:

• Elimination of double taxation risk.
• Simplified invoicing (issued excluding tax).
• Improved cash flow for the seller.
• Smooth commercial transactions in Europe.

This is a major advantage for European companies, particularly for a company in Bulgaria invoicing its European clients or for an English LTD maintaining business in Europe despite Brexit.

Administrative Obligations

To benefit from reverse charge, the company must:

• Be registered for VAT in its country.
• Verify the customer’s VAT number (via the European Commission’s VIES database).
• Include on the invoice the reference to the legal article allowing the exemption (“VAT reverse charged”).
• Companies must also maintain rigorous accounting and retain supporting documents, which relates to the need for solid and credible economic substance.

Practical Examples

• An IT consultant based in France invoices a client in Germany: the invoice is issued excluding tax, the German client applies reverse charge for VAT.
• A British LLP invoices services to a Spanish company: the invoice is excluding tax, the Spanish company remits the VAT in Spain.
• A company in Bulgaria sells goods to an Italian company: invoicing excluding tax, VAT is paid by the buyer in Italy.

Conclusion and Recommendations

Intra-Community VAT and reverse charge are essential mechanisms for any company doing business in Europe.

Key Takeaways:

• B2B sales between European companies are invoiced excluding tax, with reverse-charged VAT.
• B2C sales follow the country of consumption rule, often via the OSS one-stop shop.
• Clear and compliant VAT management is a mark of credibility, particularly when opening a bank account with a foreign company.

At service-societe.com, we assist our clients in obtaining their intra-Community VAT number, managing their obligations, and structuring their international business.