Digital services form a major component of the growing e-commerce sector. As a result, it is not unusual for businesses to offer services outside their own country. Explore which special tax rules apply when selling digital services abroad and how to implement these in your business.
What's in this article?
- What are digital services?
- Taxing digital services
- Digital services for businesses (B2B) in other EU countries
- Digital services for customers (B2C) in other EU countries
- Taxation for customers in third countries
What are digital services?
Digital services are defined in Section 327 BGB of the German Civil Code, and encompass the offering and provision of digital content and services through the internet and other comparable electronic media. They represent data use and storage services that are accessible digitally – for example, via an online platform.
As well as being easy to scale, offering digital services is an inexpensive way for businesses to generate sales via the internet, thanks to them being processed automatically and easy to reproduce. Provided that best practices are observed, once digital content has been made available for use on a web platform, no further production and staffing costs are typically incurred – except for costs such as licence fees in the case of streaming services.
Common digital services include the provision and offering of:
- Digital media available for streaming and download (for example, images, videos, music, e-books and digital television)
- Software and web applications
- Websites and web hosting
- Databases and online storage (cloud services)
- Online communications services, such as email and messenger tools, plus social media platforms
Taxing digital services
If a business only offers its services in its own country, tax will be subject to the corresponding domestic value-added tax (VAT) law. However, businesses often choose to offer their digital services abroad. Because this involves providing services in the form of data over the internet or a comparable electronic medium, the location of the business is irrelevant to delivery and storage costs.
Local VAT law applies when selling digital services in other countries. However, several special European Union laws apply depending on the status of the end customer.
Digital services for businesses (B2B) in other EU countries
Tax for business customers in other EU countries is governed by the reverse charge process. This means that the tax liability of the provider and the customer switches round.
For example, if a business in Germany provides services to a business in Belgium, no VAT is stated on the invoice. Instead, the Belgian business assumes the tax liability for the service and can declare it to the Belgian tax authority. The purpose of this arrangement is to simplify bureaucratic processes and prevent tax fraud.
Issuing a reverse charge invoice
Because the tax liability switches to the other party in a reverse charge process, invoices sent to a business customer in another EU country should state a net value and no VAT. As well as the usual mandatory information, the invoice must also include both parties' VAT identification numbers and a reference to the reverse charge process – for example, "Reverse charge" or "Local VAT applicable".
Digital services for customers (B2C) in other EU countries
If a business offers digital services to a private individual in another EU country, the invoice must indicate the VAT applicable at the place of delivery. The place of delivery is the country in which the service is rendered – in other words, the customer's place of residence. This means that the service is no longer taxed under the domestic VAT act, but instead under the VAT rules applicable at the place of delivery. As a result, in view of on the resulting bureaucracy and the e-commerce sector growing at such a fast pace (approximately 4.1 billion users globally in 2022), the EU has introduced the One Stop Shop procedure.
Purpose of the One Stop Shop (OSS)
The One Stop Shop was established by the EU to simplify taxation on remote sales (online trading, digital services) to private individuals in other EU countries. The regulation was introduced in 2021 as part of the VAT in the Digital Age package. OSS-registered businesses based in the EU no longer need to declare and pay their VAT in the relevant places of delivery to their customers, but instead as a single amount to their own tax authority.
Benefits of the OSS
By using the OSS, online traders offering services in multiple countries within the EU can avoid extensive amounts of administration. For example, without registering for the OSS portal, a German business supplying customers in several EU countries would have to be registered for VAT in each country. The OSS circumvents the issues of multiple VAT returns, language barriers and dealing with a range of payment deadlines. The OSS portal thus concentrates the fulfilment of all VAT obligations into a single platform, which communicates – depending on the EU country – with the domestic tax authority in the country of registration.
A further benefit is the waiver of the obligation to issue invoices. Businesses that report their remote sales in the OSS do not need to issue invoices to customers. This rule was introduced across the EU to encourage the use of the OSS.
Eligibility for the OSS
The OSS procedure can be used by any business registered in the EU. The alternative to the OSS is for sales to be taxed separately in each country where the services are delivered.
The only requirement for using the OSS is that the taxable services are sold remotely to private individuals within the EU. As a result, the destination principle applies. In other words, the VAT rate to be declared is the statutory rate applicable in the destination country. This means, for example, that a German business supplying digital services to a customer in Belgium will have to declare the Belgian VAT rate of 21% (as of 2023).
Exemptions apply to businesses whose annual net sales lie below the lower limit of €10,000. In such cases, all sales from cross-border services are taxed in the business's own country. The destination principle applies when this lower limit is exceeded.
Registration for the OSS
Businesses can register for the OSS by entering their VAT identification number in the online portal of the Federal Central Tax Office (BZSt). The OSS shall apply from the first day of the quarter following the application being submitted. Businesses should aim to register by the end of a quarter to avoid delay.
If the business was previously registered for the MOSS (Mini One Stop Shop) procedure, the predecessor of the OSS, it will not need to register again because it will have been converted to the OSS automatically.
Once registered, businesses can stop using the procedure at any time, and this can be done via the portal. Cancellation can be done at the start of a tax period (i.e. a new quarter), provided that the cancellation period of 15 days has been observed.
If no sales are reported through the OSS for two years, the business's registration may be suspended by the tax office. This is also the case if a business breaches the OSS conditions of use or fails repeatedly to file tax returns and make the corresponding payments on time. Failing to comply with the OSS regulations may result in a two-year ban from the system, valid across all EU countries.
Tax returns using the OSS
Tax returns are filed electronically in the OSS portal on a quarterly basis. The deadline for returns is the end of the month after the relevant tax quarter. In other words, the following deadlines apply to the respective tax periods:
- First quarter: by 30 April
- Second quarter: by 31 July
- Third quarter: by 31 October
- Fourth quarter: by 31 January of the following year
These deadlines also apply for the payment of any tax liabilities reported through the OSS to the relevant federal treasury.
Tax returns must include all remote sales with the respective applicable VAT rate of the EU country in which the service was provided (businesses below the lower limit are exempt). Sales figures must be in euros. When converting foreign currencies, the European Central Bank exchange rate applicable on the last day of the relevant tax quarter shall apply. A tax return (declaring zero sales) must still be submitted on time, even if no OSS sales are recorded in a given quarter.
All documents for sales conducted through the OSS should be retained for ten years. Such documents must be presented upon the request of the relevant tax office. Failure to observe any obligations and deadlines can lead to exclusion from the OSS.
Declaring tax through the OSS constitutes a supplementary VAT return for cross-border services provided to other EU countries. All sales recorded domestically must still be reported to the relevant tax office in a separate tax return.
Registering for input tax
It is not possible to submit an input VAT return through the OSS for purchases made in other EU countries. An application for input tax refunds must be made to the Federal Central Tax Office.
Taxation for customers in third countries
Businesses that provide services to third countries outside of the EU are subject to special rules when it comes to VAT. Neither the EU reverse charge nor the OSS regulations apply in such cases. However, similar rules apply in most third countries.
For instance, VAT does not need to be declared for business customers based in third countries if the service is provided by a business based in the EU. However, for customers, the destination principle continues to apply – in other words, the VAT law in the place of delivery (the customer's country).
For more information on taxing services for customers in third countries, contact the chamber of commerce for the relevant country.