Summary
- Following art. 192 of the EU VAT Directive 2006/112/EC, it is the supplier who is liable to pay the VAT to the authorities.
- There are exceptions in which case the customer is liable for VAT. Typically, there will be no VAT charged on the invoice , the customer will need to apply the so-called ”reverse-charge”, i.e. reporting input and output VAT at the same time.
- One of the exceptions is in article 194 of the EU VAT Directive 2006/112/EC : ”domestic reverse-charge for non-established suppliers”. This article is a ”may” article so optionally to be implemented by the EU Member States and applied by Non-Established entities suppliers. This option is typically used to fight fraud.
- “Domestic reverse charge,” allows Member States to deviate from the general rule of VAT liability when a taxable supply of goods or services is carried out by a taxable person who is not established in the Member State where the VAT is due.
- The essence of Article 194 is that Member States have the option to designate the person liable for payment of VAT as the person to whom the goods or services are supplied when the supplier is not established in the Member State where VAT is due. In other words, instead of the supplier being responsible for collecting and remitting the VAT, the recipient becomes liable for the payment of VAT directly to the tax authorities. This provision aims to tackle the challenges associated with cross-border transactions where the supplier is not physically present in the Member State where VAT is due.
- The details and specific conditions for implementing the domestic reverse charge mechanism may vary among Member States. Therefore, it is recommended to refer to the domestic VAT laws of each country or consult the European Commission’s information on invoicing rules to obtain accurate and up-to-date information regarding the application of Article 194 in a particular jurisdiction.
- The rule is applicable if:
- The transaction is a domestic supply of goods or services
- The country where the supply takes place chould have implemented art. 194 in its national legislation
- The supplier is a non-established entity
- Can be either VAT registered or not registered for VAT in the country where the transaction takes place
- The customer is an established entity, a taxable person not established in the country that has appointed an individual tax representative or a taxable person not established in the country and directly registered for VAT in the country (no appointment of an individual tax representative).
- The application of the Domestic may be different based on the status of the customer.
- The non-established Supplier issues an invoice from its local or foreign VAT id (depending on country) without VAT . The invoice needs to contain the exemption statement passing the liability of VAT to the Customer , eg: “Reverse Charge under art 194” or “Invoice subject to Reverse Charge”.
Example
If you have a VAT number without a permanent establishment in France and buy goods locally to subsequently sell them to a French VAT registered customer, you will be charged VAT on your purchase, however, the reverse charge applies on your sale. Your invoice will not include VAT, instead, you must state the following reference in the invoice: Reverse charge – Art 194 of Directive 2006/112/EC. You will then report this sale in your VAT return as a zero rated supply (box 7A of your French VAT return). Your final customer will have to manually calculate the VAT amount at the applicable VAT rate (French standard VAT rate is 20%) and report this amount as due and as deductible in the VAT return. The cash effect will be nil.
Relevant article in the EU VAT Directive 2006/112/EC
Article 194
1. Where the taxable supply of goods or services is carried out by a taxable person who is not established in the Member State in which the VAT is due, Member States may provide that the person liable for payment of VAT is the person to whom the goods or services are supplied.
2. Member States shall lay down the conditions for implementation of paragraph 1.
Impact of ViDA
Art. 194 is one of the articles that is proposed to be changed as of Jan 1, 2027.
- ViDA Analyzed – Part 10: Member States should allow ”Domestic reverse-charge” (Art. 194)
- ViDA – Impact on business processes – Part 3: Member States ”Shall Allow” ”Domestic Reverse Charge” as of Jan 1, 2025 (Art. 194)
- Optional reverse charge mechanism to stay in place until 2027
- Reverse charge until December 31, 2026
Overview of the application of article 194 in the EU Member States
A business case with a (•) in the conditions applicable for both the supplier and customers is subject to reverse-charge.
See also
- EU Reverse Charge: What Is It And Who Is It For?
- The reverse charge arrangements in the EU
- How does the reverse charge on VAT work?
- Overview of the VAT reverse charge in Europe: Mechanism, rules and Possible Scenarios
In this series: EU VAT Directive 2006/112/EC Explained – Overview of the Articles covered
