Tax regulations for online shops with international fulfillment and shipping

Delivery thresholds and VAT regulations are tiresome topics for e-commerce merchants. Things get particularly complicated when companies ship to other EU countries or store their goods in a fulfillment center in another EU country. In the following blog post, we will clarify which aspects you have to consider as an online store in cross-border e-commerce.

Exceeding delivery thresholds

In general, the goods are taxed in the EU country from which they are shipped - i.e. the country of origin of the delivery. Assuming you are registered with your company in Germany and ship to a private customer who is also located in Germany, you pay the VAT to the tax office you are familiar within Germany.

However, if the parcel shipment goes to another EU country and crosses the border, you may have to pay VAT in the recipient country. This depends on how high the delivery threshold is in the respective country and whether you have already exceeded it.

What actually are these delivery thresholds?

When cross-border sales to end consumers in another EU country exceed a certain turnover threshold, the place of VAT liability shifts to that country of destination. This threshold, also known as the delivery threshold, is 35,000 euros net in most EU countries and always relates to the current calendar year. By the way, the net turnover that is taken into account is made up of net amounts from the payment for the goods as well as the shipping and packaging costs. It is also important for online retailers to know that deliveries to companies, i.e. B2B deliveries, are not included.

As soon as you exceed the delivery threshold, you must pay tax on the subsequent sales in the remaining calendar year in the country of destination.  

A list with all delivery thresholds of the EU member states can be found at the bottom of the page here. Caution: from 2021, however, new regulations are expected to come into force and the thresholds in the European Union will be lowered to 10,000 euros.

Common mistakes made in e-commerce

In particular, international online retailers who store their goods across borders in several fulfillment centers often run the risk of making mistakes when it comes to tax regulations. For example, when parcel shipments are sent to a specific EU country from different logistics warehouses located in different states within the European Union. It is important to know that there is only one delivery threshold for this destination country and the country of origin of the delivery is irrelevant.

Practical example:
You use Amazon FBA and your goods are stored in the Czech Republic and Poland. Many of your customers are located in Austria and you have sold goods worth 20,000 euros net from the Czech Republic to Austria, but some of the products are also sent from Poland to Austria. With a delivery threshold of 35,000 euros, this means that you can still generate net sales of a maximum of 15,000 euros in Austria by shipping from the Polish warehouse without paying sales tax in the country of destination. If you exceed this delivery threshold, you will be liable to pay tax in Austria as an online retailer.

Delivery thresholds and their relevance for online retailers

On the one hand, delivery thresholds are intended to prevent tax dumping by online retailers. Without a legal regulation, traders would understandably set up shop in those EU states where the lowest VAT rates apply. In this way, they would only pay VAT in the country of origin of the delivery and the destination of the parcel shipment would be irrelevant.

On the other hand, this EU regulation also prevents small and medium-sized businesses from having to register for tax in another EU state and pay VAT there, starting with the first euro of sales. This would not only severely restrict and delay international shipments but would also involve high costs and administrative work.  

Waiver of the delivery threshold

In some cases, it may make sense to waive the delivery threshold from the beginning. This is especially advantageous if you, as an online shop, store your goods in an EU country in which the VAT is higher than in the country to which you send many shipments and thus generate a large part of your sales.

Note, however, that according to the VAT law you are bound to this waiver for two calendar years and the member states of the European Union also have the right to extend this period. If you find this procedure interesting, it is advisable to research the respective country in detail.

Cross-Border E-Commerce Fulfillment

The cross-border storage of goods in different fulfillment centers poses major challenges for online retailers. However, this is important not only for companies using Amazon FBA, but also for larger international online stores. By thoughtfully distributing products based on the geographic distribution of demand, it is possible to reduce shipping costs and time. This allows a web store to offer its customers free and fast shipping.

In principle, goods delivered to a foreign fulfillment center must be registered for tax purposes in the respective state and the company must take care of an advance VAT return. Unlike the delivery thresholds, this regulation applies from the first product and is independent of the value of the goods. In fact, such activity falls under "intra-community transfer", where a product is delivered from one EU country to another. In order to prevent tax fraud, the European Union has implemented a variety of legal regulations that ensure the recording of such flows of goods.

This supply has essentially no impact on cash for tax purposes, but the theory behind it is a bit more complicated:

1. As an online trader, one must declare this "intra-Community shipment" in the home country and also issue an invoice in this context. Since in this case, the company issues an invoice to itself, this is a pro forma invoice.
2. At the same time, in the country to which the goods are delivered to the fulfillment center, a trader is obliged to declare the delivery as an intra-Community acquisition in the context of the advance VAT return. Through the input tax deduction, the sales tax incurred for this acquisition can be refunded. This does not result in any additional costs for the retailer, but in this way, the tax authorities in the respective country know that the goods are stored and sold in that country.

The harmonized regulations for VAT at the European level, therefore, stipulate for online retailers that VAT must be paid in the country in which e-commerce fulfillment takes place, regardless of the company's registered office, and thus in which shipment to the end customer begins.

Additional info:
If you regularly move goods within the EU for delivery to appropriate fulfillment centers, the value of your intra-EU movements may exceed a certain threshold. These must then be reported, as the movement of goods within the EU is recorded - however, this reporting requirement is not the same for all EU countries. 

Conclusion

The choice of a suitable logistics partner for handling e-fulfillment has significant implications for online retailers in terms of tax obligations. In this context, it is not the company headquarters but the country in which the goods are stored that is decisive. In addition, online stores must take into account the delivery thresholds for cross-border parcel shipping within the European Union, which means that the VAT liability may shift to another country.