The world is now the playground for digital products. And the explosive growth of the SaaS and software industry confirms this
So, it's no surprise that businesses are often eager to go global and explore markets well beyond their borders.
But, where there is demand, there are also sales tax laws and systems in place that SaaS providers looking to grow and expand need to be aware of.
And that holds true for Europe, by the way!
Achieving and maintaining VAT compliance in Europe is complicated, but with the right partner, it can become a strategic business move. The partnership we are referring to is the Merchant of Record.
In this article, we plan to discuss:
VAT Exemption Certificates For B2B SaaS
4 Implications of Inaccurate VAT ID Validation
Why is the Merchant of Record the Solution?
What is VAT in Europe?
Before we get into the nitty-gritty of the VAT management process sales tax obligations in Europe, we need to address the elephant in the room - and that’s specifically what this tax stands for.
Value-added tax (VAT) is a consumption tax on a product or service applied to each sale made in the EU.
Since VAT is a consumption tax, the customers pay SaaS sales tax, not the SaaS businesses. However, this means that you need to be well aware of the VAT value to know how much you need to charge. Because later, you will need to report and remit it to the relevant authorities
Now, when it comes to VAT, the exact amount varies. There is no universal number for sales tax rates for digital and software as a service goods.
Tax rates in Europe vary between 17-27%, so it’s important to do your research and check specific local taxes on SaaS transactions based on the countries in which you are selling.
Sales tax on SaaS can change, which is why you need to stay on top on updates to ensure that you are charging the correct rate.
Check the 2024 VAT changes using the list here.
When To Charge EU VAT
No, you shouldn’t check moon phases to figure out when to charge EU VAT for your SaaS product.
To figure out when you need to collect sales tax for your EU sales, ask the following two questions:
- Where is the customer located?
- Is it a B2B or B2C transaction?
Now, let’s clarify some things:
You must charge VAT on every sale if you are an EU business selling in your home country.
When selling abroad, there are different scenarios for B2B and B2C transactions.
For B2B payments, you do not need to charge VAT, as there is a reverse-charge method that states that the buyer will pay VAT to their government. In this case, you only need to request and validate a VAT ID from your business customer, as well as specify on the invoice that the transaction is subject to a reverse VAT charge.
For B2C payments, you are required to charge VAT for all customers. However, in this case, there is the €10,000 in cross-border sales per year threshold. If you stay below it, the VAT amount is that of your home country. If you go over it, the VAT rate is specific to your customer’s country.
Non-European countries apply the reverse-charge mechanism for B2B transactions; for B2C transactions, the VAT rate is that of the customer’s country.
EU VAT Compliance in 5 Steps
Achieving EU VAT compliance is a complex process, to say the least, but it can be boiled down to five straightforward steps:
Step 1: Register your business to obtain the VAT number.
Step 2: Establish who your customers are and where they are from.
Step 3: Clarify the type of transactions you have and apply VAT correspondingly.
Step 4: Keep clear VAT-related records and invoices.
Step 5: Submit VAT returns quarterly.
But don’t be fooled by how simple the EU VAT compliance might appear. Following tax regulations involves a lot of time, experience, and resources, not to mention it is an ongoing effort.
This is why most SaaS businesses join forces with a Merchant of Record that has the experience, infrastructure, and expertise to navigate the increasingly complicated EU tax landscape successfully.
VAT Exemption Certificates For B2B SaaS
An exemption certificate issued by a qualified authority grants a business or individual an exemption from paying sales tax.
To make tax-free purchases, a customer must present the seller with this document at the time of the purchase. If they fail to do so, the seller must charge and remit tax.
Please be aware that the seller may request copies of the exemption document.
Now that we’ve clarified what an exemption certification is, let’s look at some of the most common types that exist.
VAT Exemption Certificate for EU Transactions: Once obtained, this document can be used by businesses to prove they are eligible for intra-community VAT exemptions when trading within the EU.
Resale Certificate: A resale certificate can be used to obtain a VAT exemption when purchasing SaaS services, as long as the intention is to resell those services. In that situation, the end customers will be responsible for covering VAT.
Tax-Exempt Organization Certificate: In some jurisdictions, non-profit organizations can obtain VAT exemptions for specific SaaS services. Typically, they will need to provide their Tax ID to claim this exemption.
Reverse Charge Mechanism Certificate: This VAT compliance scheme shifts the VAT liability from the supplier to the customer in some specific business transactions.
Small Business Exemption Certificate: Some countries offer exemptions or reduced VAT rates for businesses up to a certain revenue threshold.
The VAT ID Validation Process
VAT ID validation is a critical operation in the context of achieving SaaS tax compliance in Europe.
Since the reverse-charge mechanism is implemented in the EU, it’s essential that SaaS companies successfully complete the VAT ID validation process to verify and authenticate the information provided.
Simply put, here are the steps involved:
Step One: Data Collection
Obtain the VAT ID registration number either during the sales process or invoicing phase.
Step Two: Data Verification
Verify the VAT ID format to see if it follows each country’s format.
Step Three: Cross-Checking
Cross-check the VAT ID number against the VIES (VAT Information Exchange System) using a reliable validation service or portal. This is a necessary step in ensuring the ID number exists and is linked to a valid business.
Step Four: Validity Period
Verify the VAT ID’s validity period to ensure it has not expired or been revoked. This is an essential step for subscription businesses.
Step Five: Customer Data Reviewing
Check the customer’s business details to ensure they match the data associated with the VAT ID in the registry.
Step Six: Customer Notification
Notify the customers of the outcome, either confirming the validity of their VAT ID or indicating any discrepancies or issues with the information that has been given.
Step Six: Customer Notification
Notify the customers of the outcome, either confirming the validity of their VAT ID or indicating any discrepancies or issues with the information that has been given.
Step Seven: Proper Documentation
You must maintain a record of the VAT ID validation process, indicating the steps taken, methods used, results, tax documents, and any correspondence you may have had with the customer.
Implementing a robust VAT ID validation process to ensure compliance, protect your SaaS from fines or reputational damage, and maintain consumer trust is a must.
4 Implications of Inaccurate VAT ID Validation
It would be an understatement to say that staying on top of VAT compliance can be quite challenging. Additionally, complying with a SaaS company’s tax obligations often involves coordinating various teams and resources. We understand why postponing as much as you can might appear like a solid plan.
Only that would be a mistake. A big one.
Delaying compliance can have profound implications that could ultimately affect the health and profitability of your business. And here are just some of them.
To learn more about common sales tax mistakes in the SaaS industry and how to avoid them, check out this detailed article: Sales Tax Mistakes in SaaS.
Legal Consequences
Tax authorities may find it necessary to impose different penalties or fines and can even decide to take legal action against your SaaS business if your VAT ID validation process is inaccurate. Not only would these consequences cost your business, but they might also affect your reputation, leading to even greater revenue losses.
Increased Audit Risk
Since digital goods and SaaS taxability and VAT compliance are relatively new, the need for audits for international businesses is growing. The problem isn’t that regulators wish to ensure compliance rules are followed. An audit can potentially lead to additional costs and administrative burdens. A faulty VAT ID validation process will increase the likelihood of being selected for an audit.
Operational hurdles
Inaccurate VAT ID validation can increase operational workload because you must correct errors, amend tax returns, and handle customer disputes. These operational inefficiencies require employing various resources, which would, of course, take away from core business activities.
Tax Liabilities
At the end of the day, you are responsible for VAT on the sales you make, whether your customers pay it or not. If a faulty VAT ID validation process gets in the way of maintaining compliance, you might find yourself responsible for the sales tax rate you should have collected from your shoppers.
Why is the Merchant of Record the Solution?
As we were saying, VAT compliance in Europe and anywhere else in the world can be a real headache. However, achieving VAT compliance can become a real business asset and a strategic move when approached correctly.
But between setting up a dedicated system for VAT validation, registering for, collecting sales tax, remitting VAT, and managing tax risks, where does that leave your product?
Juggling too many tasks simultaneously will only lead to increased inefficiency throughout your entire operation, which obviously you don’t want.
So, what’s the solution?
Partnering with a Merchant of Record, that is ready and fully able to help you navigate tax compliance on an international and domestic level.
Here is why:
Simplified Tax Compliance. Acting as a reseller for SaaS and software, the Merchant of Record takes on the entire tax liability and handles all of the VAT compliance, including registering for VAT, collecting and remitting VAT, and dealing with tax authorities. Without the need to manage sales tax yourself, you can focus on other relevant tasks.
Innovative technology. Relying on a strong MOR partner with an innovative payments infrastructure in place, you can count on the VAT ID validation process's efficiency and ensure that inconsistencies and errors are avoided.
Dedicated Customer Support. An MoR will take charge of customer support for your digital products, which includes addressing customer questions related to VAT and managing refund requests. This delegation can free up your team’s time, allowing them to concentrate on other critical business areas.
Minimize Compliance Risk. By having a dedicated in-house team of tax experts with an extensive understanding of compliance frameworks, the Merchant of Record (MOR) can perform a range of verifications to ensure strict compliance with regulations.
Reducing Operational Workload. Partnering with a Merchant of Record can significantly ease the administrative burden of selling digital products in Europe. This includes invoice creation and management, managing customer returns, and addressing the notoriously labor-intensive chargeback issues.
Fast Market Expansion. Working with an MoR enables you to effortlessly expand your market presence across Europe. A Merchant of Record can serve as your legal representative in each country, allowing you to sell your digital products without establishing a physical presence in every country.
The Merchant of Record that helps you grow
PayPro Global takes away the headache of selling your products worldwide. From local payment methods to simplified subscription handling and tax management, we give you the eCommerce tools you need to scale your business smoothly into the global market.
How Can PayPro Global Help?
Looking to expand across Europe?
You’ve come to the right place.
When you partner with PayPro Global, you can confidently and effortlessly sell your SaaS, software, and digital goods to customers in different European markets.
We know the ins and outs of achieving EU sales tax compliance, and we are ready to scale your SaaS business rapidly.
Our Merchant of Record offers end-to-end VAT compliance management, taking operational frustration off your list of responsibilities and allowing you to focus on what matters most: your product.
As a PCI-DSS Level One Certified partner, we ensure that the highest payment security standards are upheld.
Offering 24/7 multi-language customer support, we ensure that VAT-related queries are handled professionally and promptly so that your customers benefit from a flawless customer experience.
With over 15 years in the payments industry, we understand the nitty-gritty of EU compliance management and have strong, innovative infrastructure in place, ready to automate processes, reduce compliance costs, and mitigate the risk of penalties.
Find out more about our all-inclusive payment infrastructure and how you can access a platform that will scale your business in global markets strategically.
Final Thoughts
EU VAT compliance is a complex endeavor. There’s no question about it.
But hiding from all the necessary operations you need to complete or not paying attention to the process connected to existing laws will only catapult your SaaS business into a world of potential challenges.
While achieving EU VAT compliance for your software solutions may initially appear as nothing more than an operational mandatory requirement, it holds the potential for much more.
It can be a strategic advantage, particularly when you opt for the intelligent approach of partnering with a Merchant of Record (MoR).
When you join forces with an MoR, you're not just following local tax laws and regulations. Instead, you're building a robust sales tax strategy that promises operational efficiency, increased profitability, decreased tax fraud, and swift market expansion.
Undoubtedly, these are all highly desirable outcomes for all software companies, wouldn't you agree?
Frequently Asked Questions
What is VAT in Europe?
VAT in Europe stands for Value-Added Tax, a consumption tax that customers pay on each sale within the EU.
When should I charge EU VAT for my SaaS product?
If you are an EU-based SaaS company selling in your home country, you must always charge sales tax. If you are selling abroad, however, answering this question is a bit more complicated. You are required to charge EU VAT based on the customer's location and transaction type (B2B or B2C).
What are the steps to achieve EU VAT compliance?
To achieve EU VAT compliance, you need to follow five steps: register for a VAT number, identify customer locations for the countries you wish to expand in, apply VAT correctly, maintain clear records, and submit quarterly VAT returns.
What are VAT exemption certificates?
VAT exemption certificates allow businesses or individuals to be exempt from paying sales tax. At the time of the purchase, businesses are required to present these documents and sellers may require copies of the certificates.
Why should I partner with a Merchant of Record for VAT compliance?
Joining forces with a Merchant of Record brings forward a number of benefits for SaaS businesses selling within the EU. An MOR partnership simplifies VAT compliance, reduces operational workload, minimizes compliance risk, and enables fast market expansion across Europe.
Meir Amzallag
Co-founder and CEO of PayPro Global
Ioana Grigorescu
Content Marketing Manager at PayPro Global
