If you are a Shopify store owner based in the European Union, it is important to understand when to charge VAT or even which rate applies to which customer. This article will help you understand this topic and correctly set up your store.
The most important distinction for your business (the company that runs your store) is whether it is VAT-registered or not.
Many businesses start as unregistered, but they need to register for VAT once their annual turnover (total sales) is above a certain threshold. This threshold is usually around €35,000 in some EU countries and €100,000 in others.
My business is not VAT registered
If your annual turnover is below the VAT registration limit of the country where your store is based, then most likely it is not VAT registered.
This means that you do not charge VAT on your sales regardless of where your customers come from.
My business is VAT registered
If your business is VAT registered, you have to charge VAT to some customers and not to others. You also need to include your VAT registration number on your invoices and receipts to make them valid.
There are two factors which determine whether or not you should charge VAT — what country your customer is in and whether you are selling to a consumer (B2C) or business (B2B).
Customers from the same EU country
When selling to consumers (B2C) and businesses (B2B) in your home country, you should always charge VAT and use the relevant VAT rate in your country. This applies to selling both physical and digital goods.
Customers from different EU countries
When selling to customers from other EU countries, you need to distinguish between selling to consumers and businesses and in case of the former, between selling physical and digital goods.
Consumers buying physical goods
When selling physical goods to consumers (B2C sales) from other EU countries, you should always charge VAT to them.
Unless the total value of your sales to the customer's country exceeds a certain limit, you charge the VAT rate of the country your business is based in.
If your annual sales to a certain country exceed their VAT threshold, you will need to register for a local VAT registration number and then charge the VAT rate of the customers country. VAT thresholds vary from state to state and are typically around €35,000 or €100,000 per year. Non-Eurozone countries will have the threshold in their local currency.
In such cases, your business will have multiple VAT registration numbers and you should make sure appropriate VAT numbers are always included on your invoices.
Consumers buying digital goods
When selling digital goods (such as e-books, downloadable music, stock photographs or online courses) to consumers (B2C sales) from other EU countries, you should charge the VAT rate applicable in the customer's country.
The VAT rates in different EU countries vary (from 15% to 27%) so you will be charging VAT differently to customers from different EU countries.
Shopify allows you to automatically set these tax rates for individual EU countries.
When selling to businesses with valid VAT numbers (B2B) from other EU countries, you do not charge them VAT for either physical nor digital goods.
Such customers should be marked as tax exempt in your Shopify store. You should also make sure you capture and validate VAT registration numbers from your business customers before allowing them to purchase your products without VAT.
Sufio allows you to easily capture and validate EU VAT numbers from your business customers and, when applicable, automatically set them as tax exempt.
Sufio also creates invoices that include all the necessary details to make them compliant with your invoicing legislation. Invoices can serve as valid documentation to show that your products were shipped to another EU member state.
Customers outside the EU
When selling to customers outside of the EU, you should not charge VAT on any goods.
You will still need to report the sales for VAT and taxation purposes, but show them as sales with 0% VAT. Valid invoices, such as those created by Sufio, can serve as documentation that the goods were shipped outside of the EU.