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Ecommerce Services > European VAT Trading > Online Payment Gateway

VAT Planning for trading within the European Union

Value Added Tax

Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services.  It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons (i.e., VAT-registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

The EU E-Business Directive

Effective from 1st July 2003, the EU "E-Business Directive" (2002/38/EC) imposes VAT on services and information delivered via the internet within the EU.  This amounts to a tariff of between 13 and 25 per cent on software and music downloads, transactions forming part of online auctions and subscriptions to internet service providers, sold over the internet anywhere within the European Union.


This Directive applies to non-EU companies and thus if your company is based outside the EU and

provides Internet delivered information or services within the EU, this is a failure to register and account for VAT that could render you or your company liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences.

Activities covered by the Directive

The Directive applies to the following activities:

  • Radio or television broadcasting services solely broadcast over the Internet or a similar electronic network.
  • Electronically supplied services, i.e. Website supply, web-hosting or distance maintenance of programs and equipment.
  • Software and software updates.
  • Electronic images, text, information or databases.
  • Music, films, games and webcasting of events.
  • Distance teaching of an automated nature.

Whilst the following activities fall outside of the Directive they create VAT issues:

  • Soliciting and/or taking orders.
  • Issuing invoices to customers.
  • Procuring goods and services.

EU VAT Registration Obligation

Non-EU vendors must register for VAT in one of the European Union Member States.

The VAT authorities of the Member State in which the Non-EU vendor has registered will remit VAT collected to the states in which sales have been made.

The rate of VAT and rules relating to VAT vary from state to state. Sample rates of VAT:

  • Luxembourg 15%
  • Madeira 15%
  • Malta 18%
  • UK and the Isle of Man 17.5%
  • Sweden 25%
  • Denmark 25%

The residential address and VAT status of every customer would need to be established and recorded and VAT would need to be applied accordingly.  Full records would have to be maintained for the VAT authorities. This could become impossible to administer.

The advantages of establishing a Subsidiary within the EU

An option for Non-EU vendors lacking an EU subsidiary or a fiscally inconvenient EU subsidiary is to establish a subsidiary in a Member State where VAT is low or there exists other fiscal or operational advantages.  For instance, Maltese companies owned by non-residents can enjoy corporate tax rates as low as 4%.

The establishment of a subsidiary within the EU circumvents the need to clarify the location of each customer as local VAT regulations would apply and the subsidiary would be regarded as a normal EU enterprise.

Setting up a solution with one of our offices

All our solutions are provided by EuroConsulta International offices, each of which has practical experience in implementing solutions for EU VAT and Internet Delivery.

Malta's e-commerce environment

Our Malta office, supported by a fully staffed back office operation, operates in an attractive fiscal regime with a VAT rate of 18%.  Malta enjoys high quality Internet infrastructure provided by the local bandwidth provider Datastream as well as a separate service by Vodafone.  One of the foremost countries in the field of e-government, Malta is fully geared up for e-commerce and currently hosts the servers and operations of the worlds largest online gaming and casino operators, with a significant majority of UK betting companies relocated to Malta under the new i-gaming licence regulations.  Microsoft has also set up a significant base in Malta.

For more info on our VAT planning services and incorporation of EU VAT registered companies for EU trading, click here.  


Ecommerce Services > European VAT Trading > Online Payment Gateway



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