EU VAT Directive 2006/112/EC explained: Art. 194 – Domestic Reverse Charge for Non-Established entities

The scope of this article does npt cover the application of reverse-charge on the supply of specific materials as mobile phones, waste material, etc

Importance

Relevant article in the EU VAT Directive is artcile 194 (see below). This article is a ”may” article meaning the EU Member States have the option to implement it, it is not mandatory.

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 should 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.

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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.

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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

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Which Member States implemented article 194?

• Belgium
  • Supplier is a taxable person not established in Belgium
  • Customer
    • Established in Belgium and filing periodical Belgian VAT returns or;
    • Not established in Belgium but being VAT registered in Belgium and having appointed a fiscal representative
• Croatia
  • Supplier is a non- established business is not registered for VAT in Croatia
• Estonia
  • Supplier is a non- established business is not registered for VAT in Estonia
• Finland
  • Supplier is a non- established business is not registered for VAT in Finland
• France
  • Supplier: Not established in France – irrelevant if the supplier is  registered or not for VAT
  • Customer requirements – VAT registered (irrelevant if the customer is  established or not)
• Italy
  • Supplier: Not established in Italy
  • Customer: Established in Italy
• Latvia
  • Supplier is a non- established business is not registered for VAT in Latvia
• Lithuania
  • Supplier is non-established in Lithuania
  • Customer is established in Lithuania
• The Netherlands
  • Supplier: Not established in the Netherlands
  • Customer: Established in the Netherlands
• Poland
  • Supplier: Not established and not VAT registered in Poland
  • Customer: Established in Poland
• Portugal
  • The supplier is
    • not VAT registered in Portugal or
    • VAT registered in Portugal without having appointed a VAT representative
  • The customer is
    • A taxable person established in Portugal
    • A taxable person not established in Portugal but being VAT registered in Portugal and having appointed a fiscal representative
• Romania
  • Supplier: Not established in Romania
  • Customer: Registered for VAT in Romania
• Slovenia
  • Supplier: Not established in Slovenia
  • Customer: Registered for VAT in Slovenia
• Spain
  • Supplier: Not established in Spain (irrelevant if the supplier is  registered or not for VAT)
  • Customer: Registered for VAT in Spain
• Sweden
  • Supplier: Not established in Sweden
  • Customer: Registered for VAT in Sweden

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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