The European Union Value Added Tax (EU VAT) is type of a tax which is levied on most goods and services that are traded for consumption within the EU. It is applied when a VAT registered business sells goods or services to buyers based in EU. "Value added" in VAT refers to the amount by which the value of a product is increased at each stage of production and distribution.
Also, VAT is an indirect consumption tax, because it is paid ultimately by the consumer and turns out to be neutral for VAT registered businesses.
It is mandatory that you register for VAT in the EU state where your business is incorporated in. Depending on the products/services you sell in an EU member state , you may have to register for VAT in that member state. You can choose between two options for registering in member states,
a) Register for VAT in each EU member state where you sell your products.
b) Or register for VAT MOSS depending on the service you provide.
Who is taxed ?
If you sell to a buyer without a VAT number, it is considered to be a B2C transaction and the buyer is said to be a consumer/individual. VAT is taxed for a consumer and the rates depend on various factors as discussed in the following section.
If the buyer provides a valid VAT number, the transaction is considered to be a B2B transaction and the buyer is treated as a business. VAT rates for businesses depends on factors as discussed in the following section.
Rules for determining VAT rates :
If the buyer is from the same EU member state as the seller, VAT rate of the seller's country is applied irrespective of the buyer being a consumer or a business.
If the buyer is a consumer from a different EU member state, the VAT rates depend on the type of service.
If the buyer is a business (supplies a valid VAT number) from a different country of that of the seller, VAT is not applied according to the reverse charge mechanism.
Location Validation (For Digital Services):
If you sell digital services to consumers, VAT rates depend on the Place of supply (consumer's country). For example, If a customer makes a purchase from France and the seller is based in UK, Place of Supply is deemed to be France and VAT rate of France is applicable.
To ensure the right VAT rate is applied, location of the customer has to be validated. For each transaction, businesses will be required to collect at least two of the following pieces of information which must be non-conflicting evidences as proof of location of their customers -
Customer's billing address country.
The IP address of the device used by the customer.
Location of the bank from which payment was made.
The country code of SIM card used by the customer.
The location of the customer's fixed land line.
Credit Card's BIN
Please note that both pieces of information collected as location evidence must be non-conflicting and this information must be stored by businesses for at least 10 years.
As a merchant to ensure you comply with EU VAT regulations, you will have to configure EU VAT in Chargebee. EU VAT is applied only if the customer's country supplied in the billing address is an EU member state.
Chargebee ensures that you comply with the latest EU VAT rules in the following way.
Location Validation (For Digital Services)
The primary source for the customer's location is the "Country" present in the Billing Address of the customer.
The customer's country must match either of the two evidences mentioned below,
The location of a customer can be determined based on the IP Address of the device used to make a purchase.
If you have integrated with Chargebee using the hosted pages, the IP Address of the customer will be collected automatically.
For API users : If you use the Chargebee API, you will have to pass the IP Address of the customer to Chargebee using the User Details Header API .
If you create a subscription via the web interface, the IP Address is not taken into account. In such cases, only the country identified from the card's BIN is considered.
The first six digits of a card constitute the Bank Identification Number (BIN). BIN gives us the information about the card issuing bank and hence can be used as a way to determine the customer's location.
Chargebee makes use of an internal service to lookup the country based on BIN.
Additional points about Location Validation:
If you offer PayPal Express Checkout as a payment method, the country present in the customer's PayPal account is used as one of the sources for location.
In case you are an API user and make use of Stripe's js to collect card information, the "Country" of the card is retrieved from Stripe by Chargebee.
When customers update their payment method information using the hosted pages, the origin country of the customer's IP Address is used as one of the sources for location.
Failure of Location Validation :
If the location validation fails, the customer will not be able to complete the order and will see an error as below,
If a customer signs up for a trial plan which involves no immediate payment, the subscription is created irrespective of whether the location validation was successful or not. The details of the customer are marked with a warning indicating that the location validation failed, as shown below.
When the trial ends and the location validation is still not successful, the subscription will be canceled.
VAT Number Validation
If you sell to businesses, it is mandatory that you collect the VAT number in order for it to be considered as a B2B transaction. We verify the validity of a VAT number entered in the checkout page using the European Commission's VAT Information Exchange System (VIES).
If the customer's country is same as your country of incorporation (country specified by you in Site settings), VAT will be applied as per your country's rate.
If the customer is based in a different EU country, VAT will not be charged as a reverse charge mechanism is applied and customer will be responsible to account for VAT in their country. A sample invoice for a VAT exemption is as shown below,
To configure EU VAT with Chargebee, follow the sequence of steps,
1. Specify the country where your business in incorporated in
Go to Settings > Site Settings > Site Info > Organization Address and click Add Address/Edit Address to specify your country of business.
Save the settings.
2. Configure the tax settings
Go to Settings > Site Settings > Taxes and select EU VAT 2015
Enter a description under the Label field. This will show up on the hosted pages and the invoices whenever EU VAT is applied.
Select whether your price are inclusive or exclusive of taxes, using the Price Type option.
3. Choose the Type of Service
If you sell digital services, select Digital Service from the option. If you sell products/services apart from digital services, select Others. Find a detailed description of services classified as digital according to the latest VAT rules here.
4. Disable Location Validation (if applicable)
You have the option to disable the location validation if needed. This can be used while testing the new VAT settings.
As per the latest EU VAT rules, if you sell digital services in EU countries, we recommend that you do not disable location validation, as it is mandatory that you validate and store information about the location of the customers.
5. Disable VAT Validation for Country of Business
For certain countries such as Italy and Spain, the VAT numbers of businesses that trade within the country are not automatically available in the VIES database. Such businesses need to explicitly register their numbers in VIES if they trade with EU countries outside of their country of business. In such cases, if you have enabled the VAT number validation option, Chargebee will not allow subscriptions to pass through since the VAT number status will be invalid.
Use this option to disable VAT Number validation for your country of business, and Chargebee will allow subscriptions to pass through.
6. Select the EU Member States you have registered in
As per EU VAT rules, it is mandatory that you register with the tax authorities in the EU member state where your business is incorporated.
Select the country configured by you under Site Settings > Site Info.
Additionally, select the individual member states you have registered to collect VAT. To disable VAT for customers from a specific country, uncheck the specific country from the list.
If you've registered in all 28 EU countries through VAT MOSS, check the Select all option.
Save your Tax Settings
If you cater to businesses, there are two additional configurations that you need to make in Chargebee:
1. Collect VAT number
For a transaction to be considered B2B, a valid VAT number has to be provided by the customer. If you use Chargebee's hosted pages, enabling the VAT number option will display the VAT Number field in the checkout pages.
To enable VAT Number in the hosted pages,
Go to Settings > Hosted Pages Settings > Field Configurations and enable the VAT Number field under the Tax Information section.
The VAT Number field shows up in the hosted pages as shown below:
If you are an API user, you will have to pass the VAT number using the customer[vat_number] parameter of the Create a Subscription API . While creating the subscription via the web interface, you will have the option to add the VAT number under the Billing Information section.
2. Include VAT Exemption text
By configuring this option, you will be able to customize the text on the invoice in case of a VAT Exemption due to a reverse charge mechanism. To customize this go to Settings > Site Settings > Customize Invoice > VAT Exemption Text and enter the necessary content. This text is necessary in order to indicate that VAT has been exempted for the particular customer.
An EU VAT Invoice sent to a consumer contains the following information:
Merchant's trading name and address
Merchant's VAT number
Buyer's name or trading name, and address.
The invoice contains the applicable VAT rate for each line item and a sub-total amount before applying VAT and a final invoice amount after VAT is added. A sample invoice for a transaction with VAT applied is as shown below,
A sample invoice for which VAT has been exempted is shown below,
Chargebee makes use of VAT Information Exchange System (VIES) to validate the VAT number entered by your user.
This can be disabled for testing purposes if needed. To disable VAT Validation go to
Settings > Site Settings > Site Info > Disable VAT Validation
EU commission mandates that any VAT number entered must be validated.
If the VAT number is valid, VAT is not applied on the transaction. (If the customer is from a different country)
If the VAT number is invalid, the transaction will not go through.
If we're unable to connect with VIES to validate a VAT number, the status of the VAT number is marked as "Undetermined" and the transaction is allowed to go through. The validation process of the VAT number for this customer will be retried.
Once a successful retry is made, the customer's VAT number status is marked valid/invalid based on the result of VIES. You will be able to filter the customers with an invalid VAT number and get in touch with them, asking them to update a valid VAT number.
Filtering based on VAT number can be done as follows,
If the customer has confirmed that the provided VAT number is valid and VIES shows that it is invalid, as per the following European Commission FAQ the customer will be required to contact their fiscal administration.
What type of services are taxable as per the new EU VAT rules?
Digital services and goods that are delivered electronically with minimum human intervention. These include: Downloadable software licences and software updates, Online training tutorials, Online magazines and newspaper subscriptions, EBooks, SaaS, Advertising space on websites, Music downloads, films and games, Fee based online membership, Domain supply and web hosting services.
Following goods and services, where the internet is just used to facilitate the sale, will not get affected by the new rules - Sale of physical goods, where the ordering and processing are electronic, Physical books, newspapers or journals, Advice offered through email by lawyers and consultants operating in the financial services industry, Online booking services for events, hotel or restaurants, Ads in newspapers, posters or television, Courses, tutorials delivered by a teacher (ex - using a service like Skype)
What is VAT MOSS?
If you are a merchant selling services such as SaaS which includes a global consumer base, registering for individual member states could be a difficult task. In such cases, registering for VAT MOSS is recommended. With 28 countries and a total of 27 different VAT rates, businesses will find it difficult to register for VAT in different member states. Instead, they can register for EU's optional program to simplify the VAT process called the Mini One Stop Shop (MOSS) which will enable businesses to register in one country and pay their dues with a single payment. Learn more about VAT MOSS here .
What is Reverse Charge Mechanism?
According to the reverse charge mechanism, the recipient of the service has to account for the VAT while filing their returns. Learn more here .