New EU Vat Rules & How to Establish a Drop Shipping Company

EU VAT Rules

By Shona Hastings, 24.11.2021

Foreign investors are increasingly looking to European countries as a gateway to access and sell in the European market. Many are turning to drop shipping as a viable option to operate an eCommerce business and increase their reach and target consumers in various parts of the world. New EU VAT rules came into effect on 1st July 2021 for both EU and non-EU businesses impacting how VAT is being charged and the value of goods on which it is charged.

What is Drop Shipping?

Drop Shipping is a retail fulfilment method where the seller accepts a customer order but does not physically ship the goods.  When a product is sold, the order details are transferred to a third party (manufacturer, wholesaler, or another retailer) who fulfils the order and ships the products directly to the customer. Drop Shipping has become a popular way of operating an eCommerce business as it eliminates the cost of maintaining stock in a warehouse or bricks and mortar store and only requires access to the internet to manage a virtual online store.

Considerations before starting a Drop Shipping Company

  1. Register a new company in the jurisdiction of your choice.
  2. A drop shipping company might be liable to pay income tax or corporation tax and submit annual returns, depending on the country where the company is based.
  3. Register for VAT (if applicable).
  4. Set up of corporate bank account.
  5. Find an online supplier with the products intended for sale. There are many established companies connecting drop shippers with suppliers around the globe including; Spocket, AliExpress, and Modalyst.
  6. Establish a virtual online store with eCommerce capabilities. Or you may choose to sell via one of the popular drop shipping websites such as Alibaba, eBay, Amazon, Shopify and all other BigCommerce stores.

Euro Company Formations would recommend considering Poland, Hungary & Italy as an EU base to register your drop shipping company due to the ease and efficiency of registering and setting up a company there.

New EU Vat Rules for Drop Shipping Companies

On 1st July 2021, the VAT reform was introduced to create similar conditions for both EU and non-EU businesses by giving them the same VAT obligations. Drop Shipping Companies who sell to EU customers must adapt to the new EU VAT rules and rates for either One-Stop-Shop (OSS) or Import-One-Stop-Shop (IOSS).

The One-Stop-Shop (OSS) is an electronic portal that simplifies the VAT Return process for EU sellers and can be used by companies to comply with their VAT obligations on their e-Commerce sales to consumers, allowing them to:

  1. Register for VAT electronically in a single member state for all intra-Community sale of goods and services
  2. Declare and pay EU VAT on all supplies of goods and services in a single electronic quarterly return
  3. Communicate with tax administration in relation to the returns, regardless of if their sales are cross-border.

The Import-One-Stop-Shop (IOSS) is the electronic portal business can now use to comply with their VAT e-Commerce obligations on imported goods. The IOSS can be used by taxable persons located inside and outside the EU.

The New EU VAT Rules

  1. eCommerce businesses now need to charge VAT at the point of sale and the consumer is no longer expected to settle this charge on import.
  2. A €10,000 pan-EU threshold will apply above which VAT must be paid in the member state where goods are delivered.
  3. Online marketplaces are now liable for VAT on all items of €150 or less and so VAT may need to be changed on some B2C transactions.
  4. The VAT exemption on imported goods with a value of less than €22 has been scrapped. All goods sold to customers based in the EU, regardless of their value are subject to VAT, and goods from outside the EU no longer have preferential VAT treatment.
  5. All imported goods with a value of €150 or less are subject to VAT and any goods which exceed this amount are subject to both import duties and VAT with standard import procedures.
  6. The OSS (One-Stop-Shop) scheme can be used by Drop shippers who are using EU inventories and if drop shippers are selling goods in the EU but not established in the EU, they can still register for OSS.
  7. Both the IOSS and the OSS system allow for the filing of a single VAT return for all EU sales.

If you have any questions about the new EU VAT rules and assistance with incorporating a company in the EU to operate an eCommerce or drop shipping business, please contact us today. The Euro Company Formations team are trusted European company registration experts.

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