"Imposing VAT on Internet Delivered Information and Services"

What is the EU E-Business Directive? Does it Affect You About VAT What Activities Fall within the Directive? EU VAT Registration Advantages of Establishing a Subsidiary within the EU


The EU "E-Business Directive" (Council Directive 2002/38/EC) came into effect on 1st July 2003. The effect of this directive was to implement the imposition of VAT in on Internet delivered information or services within the EU. This amounted to a tariff of between 13% and 25% on items such as software or music downloads any transactions as part of online auctions and subscriptions to internet service providers, sold over the internet anywhere within the European Union.

By Council Directives 2006/138/EC (adopted 19th December 2006) and 2008/8/EC (adopted 12 February 2008) these VAT arrangements were extended until 31st December 2009.

However the introduction of Council Regulation (EC) 792/2002 which temporarily amended Regulation (EEC) 218/92 (administrative co-operation in the field of indirect taxation (VAT), subsequently included in Regulation (EC) 1798/2003) introduced additional measures for the registering for VAT purposes of e-service traders established outside the Community and for distributing the VAT receipts to the Member States where the services were utilised.

This introduction removed a significant competitive handicap as EU suppliers were no longer obliged to levy VAT when supplying digital products on markets outside the EU. The VAT rules for non-EU suppliers selling to customers within the Union remained unchanged, with the VAT paid by the importing company under reverse charge arrangements.

From 1st January 2015, this Directive will also provide that VAT on telecommunications, radio and television broadcasting and electronic services by a supplier established within the Community to non-taxable persons also established within the Community will be charged in the Member State where the customer belongs.

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This Directive applies to non-EU companies and thus if your company is based outside the EU and providing Internet delivered information or services within the EU you should read this as failure to register and account for VAT could render you or your company liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences.

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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 database
  • 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
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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.

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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:

  • Madeira 22%
  • Luxembourg 15%
  • UK and the Isle of Man 20%
  • Sweden 25%
  • Denmark 25%

The home address of every customer will need to be obtained, the rate of VAT applied will be dependent on that information and records would have to be maintained for the VAT authorities. Establishing the location of all customers and their VAT status could be an administrative nightmare.

Mike Lambourne, VAT director at accountant Ernst & Young, says: "The EU directive is quite specific about what hoops a company must jump through to qualify for single registration. It can't be just a brassplate operation."

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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.

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.

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

If you are interested in exploring how your business can take advantage of OCRA Worldwide's EU VAT and Internet Delivery Solutions, contact the office of your choice in the countries listed below.

Alternatively, to select one of our multilingual offices, click here for a list of our office contact details or click on the button below and request that a consultant calls you back.



Madeira, where we employ over 20 staff, with a VAT rate of 22%, an attractive fiscal regime and appropriate Internet infrastructure and bandwidth provides an attractive option.

Contact the Madeira Office


AOL and Amazon have business units in Luxembourg, which has one of the lowest rates of VAT in Europe at 15%.

Luxembourg benefits from a stable political and financial situation and a highly skilled and multilingual workforce, many international e-commerce companies are already transferring or are considering transferring their e-commerce activities to Luxembourg, which will give them a considerable competitive advantage.

Contact the Luxembourg Office


VOES ("VAT On e-Services") is a special VAT scheme for non-EU businesses providing electronically supplied services to EU consumers (that is, private individuals and non-business organisations). The scheme provides an optional, simplified means of registering and accounting electronically for EU VAT with effect from 1 July 2003. To prevent the need for such non-EU businesses registering in every EU member state where they supply customers, this special scheme allows them to register and account for EU VAT in a single EU member state of their choice.

Contact the London Office

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